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Rethinking Measures of Mergers & Acquisitions Deal Premiums

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  • Eaton, Gregory W.
  • Liu, Tingting
  • Officer, Micah S.

Abstract

Many academic studies use fixed preannouncement event days (e.g., -20,-42, or -63) to measure takeover premiums. In this paper, we show that the use of traditional fixed windows generates premiums that are underestimated by as much as 8 percentage points. This downward bias is especially severe for transactions with long processes (e.g., target-initiated deals). We take account of this bias by hand collecting deal initiation dates and show that using these dates results in measured premiums that give contradictory conclusions to those found in existing literature. We also offer guidance for measuring premiums if hand collecting data is impractical.

Suggested Citation

  • Eaton, Gregory W. & Liu, Tingting & Officer, Micah S., 2021. "Rethinking Measures of Mergers & Acquisitions Deal Premiums," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 56(3), pages 1097-1126, May.
    • Handle: RePEc:cup:jfinqa:v:56:y:2021:i:3:p:1097-1126_11
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    Citations

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    Cited by:

    1. Huang, Qiongyu & Zhang, Ruiyao & Li, Siyao & Li, Jingjing & Yao, Qiong, 2024. "The role of financial advisorʼs industry expertise in M&A quality: Evidence from goodwill impairment," International Review of Economics & Finance, Elsevier, vol. 89(PB), pages 216-231.
    2. Lauterbach, Beni & Mugerman, Yevgeny & Shemesh, Joshua, 2024. "Prospect theory in M&A: Do historical purchase prices affect merger offer premiums and announcement returns?," Journal of Behavioral and Experimental Finance, Elsevier, vol. 42(C).
    3. Gao, Xin & An, Zhe & Li, Donghui & Xu, Weidong, 2024. "Does media affect the rival response to acquisition targets?," Journal of Empirical Finance, Elsevier, vol. 76(C).
    4. Baldi, Francesco & Salvi, Antonio, 2022. "Disentangling acquisition premia: Evidence from the global market for corporate control," Finance Research Letters, Elsevier, vol. 48(C).
    5. Andres, Christian & Bazhutov, Dmitry & Cumming, Douglas J. & Limbach, Peter, 2023. "Does speculative news hurt productivity? Evidence from takeover rumors," CFS Working Paper Series 701, Center for Financial Studies (CFS).
    6. Liu, Tingting & Lu, Zhongjin (Gene) & Shu, Tao & Wei, Fengrong, 2022. "Unique bidder-target relatedness and synergies creation in mergers and acquisitions," Journal of Corporate Finance, Elsevier, vol. 73(C).
    7. Eaton, Gregory W. & Guo, Feng & Liu, Tingting & Officer, Micah S., 2022. "Peer selection and valuation in mergers and acquisitions," Journal of Financial Economics, Elsevier, vol. 146(1), pages 230-255.

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