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Rethinking Measures of Mergers & Acquisitions Deal Premiums

Published online by Cambridge University Press:  17 December 2019

Gregory W. Eaton ,
Tingting Liu Open the ORCID record for Tingting Liu [Opens in a new window]  and
Micah S. Officer
Gregory W. Eaton
Affiliation:
Eaton, gregory.eaton@okstate.edu, Oklahoma State University
Tingting Liu*
Affiliation:
Liu, ttliu@iastate.edu, Iowa State University
Micah S. Officer
Affiliation:
Officer, micah.officer@lmu.edu, Loyola Marymount University
*
Liu (corresponding author), ttliu@iastate.edu
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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.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 56 , Issue 3 , May 2021 , pp. 1097 - 1126
Copyright
© The Author(s). Published by Cambridge University Press on behalf of Michael G. Foster School of Business, University of Washington 2019

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Footnotes

*

We thank an anonymous referee, Nihat Aktas, Eric de Bodt, Audra Boone, Jean-Gabriel Cousin, Eli Fich, Paul Malatesta (the editor), Ronald Masulis, Harold Mulherin, Jeffry Netter, Annette Poulsen, Serif Aziz Simsir, and Anh Tran for providing helpful comments. All errors are our own.

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