Markup Pricing in Mergers & Acquisitions
University of Rochester, Rochester, NY 14627
and National Bureau of Economic Research
Journal of Financial Economics, 41 (June 1996) 153-192
This paper studies the relation between premiums in takeover bids involving exchange-listed target
firms from 1975-91 and the pre-announcement stock price runups. The evidence shows that in most cases
the pre-bid runup and the post-announcement increase in the target's stock price, the "markup," are
uncorrelated. Since there is little substitution between the runup and the markup, the runup is an added
cost to the bidder. This has important implications for assessing the costs of insider trading before a bid. It
also raises interesting questions about the role that information from public capital market prices play in
private negotiations related to takeovers.
Key words: Runup, Insider trading, Control premium, Efficient markets
JEL Classifications: G34, G14, G38
A full-text version of this paper, including tables and figures, is available in Acrobat's portable data format (.pdf).
The file is about 741K and can only be viewed (and printed) using a copy of Acrobat Reader. If you do not have a copy
of this program, you may download it now [this is a self-extracting ZIP file that you must install
on your computer to read PDF files]. Click here to download the
full text of the markup pricing paper.
Figures
Fig. 1 Cumulative average abnormal returns to target firms' stocks from trading day -126 to +253
relative to the first bid. All NYSE and Amex-listed target firms from 1975-91. Market model parameters
used to define abnormal returns are estimated using the CRSP value-weighted portfolio for days -379 to -127.
The 1,401 target firms that are successfully taken over are shown with a solid line. The 414 target firms
that are not taken over within the next year are shown with a dashed line. The full sample of 1,815
successful or unsuccessful firms is shown with a dotted line.
Fig. 2 Proportion of abnormal returns and volume growth rates that are positive for each of
the trading days from -40 to +40 relative to the first bid. Based on all NYSE and Amex-listed targets that received
takeover bids from 1975-91. Regression models used to define abnormal returns or volume are estimated using data for
days -379 to -127 relative to the day of the first bid.
Fig. 3 Cumulative average abnormal returns to bidder firms' stocks from trading day -126 to +253
relative to the first bid. Bids for all NYSE and Amex-listed target firms from 1975-91. Market model parameters
used to define abnormal returns are estimated using the CRSP value-weighted portfolio for days -379 to -127. The
intercepts are set to zero to estimate abnormal returns, since the bidder firms seem to have abnormally high stock
returns during the estimation period (see fig. 4 below). There are 946 NYSE or Amex-listed bidder firms which made
the first bid (shown as solid lines) and 924 exchange-listed firms made the winning bid (shown as dotted lines).
The first and winning bidders are often the same.
Fig. 4 Cumulative average abnormal returns to bidder firms' stocks from trading day -126 to +253
relative to the first bid. Bids for all NYSE and Amex-listed target firms from 1975-91. Market model parameters
used to define abnormal returns are estimated using the CRSP value-weighted portfolio for days -379 to -127.
There are 946 NYSE or Amex-listed bidder firms which made the first bid (shown as solid lines) and 924 exchange-listed
firms made the winning bid (shown as dotted lines). The first and winning bidders are often the same. The downward
drift of these lines shows that the stock returns to bidder firms were abnormally high during the estimation period,
on average, so the intercepts are too high.
Tables
Table 1
Table 2
Table 3
Table 4
Table 5
Table 6
Table 7
Table 8
Table 9
Table 10
Table 11
Table A1
Cited 0 times in the SSCI through April 1996
© Copyright 1996, G. William Schwert
Return to Publications Page