If the Acme Oil Company has 100,000 shares of stock trading at $10 per share, no debt, and a proven oil well as its only asset, how much should an identical firm pay to acquire Acme? Businessmen might fail the quiz, but finance students would probably answer: “Not more than $1 million ($10 × 100,000), excluding synergy gains or tax savings.”

This answer echoes a common presumption in the finance literature that informed securities prices credibly estimate the underlying value of corporate assets. Firms whose share prices fall below the market value of their assets – for example, many closed-end investment funds, holding companies, or natural resource firms – are frequently tagged as anomalies on the force of this view. But these “anomalous” firms happen to be the only firms whose asset values are readily visible. Here, then, is the rub: The direct evidence, as far as it goes, is more consistent with the conjecture that securities prices often “discount” – or underprice – expected cash flows from corporate assets than with the standard presumption that share prices fully value these assets. If discounts are widespread, however, they may have significant consequences for many areas of corporate behavior, including, above all, acquisitions behavior and the takeover market.

As the Acme hypothetical suggests, the standard presumption that share prices fully value corporate assets carries a basic implication for acquisition premia.