The influence of bid premium on shareholder around M&A announcements: An empirical analysis

Tiller, Luke (2009) The influence of bid premium on shareholder around M&A announcements: An empirical analysis. [Dissertation (University of Nottingham only)] (Unpublished)

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Within the widely covered topic of mergers and acquisitions two of the most widely addressed subjects are shareholder wealth creation and premiums offered to target firms. However little work has combined both of these aspects in much detail, which has been noted (Haleblian et al., 2009). Yet in spite of the limited work in this area, many assume that higher premiums result in wealth creation for target firms at the expense of acquirers. This sweeping generalisation is challenged by the research presented here.

Building on the only prior research article in this specific area, event study methodology is used to investigate abnormal returns accruing to target and acquirer firms for a sample of large UK acquisitions taking place between 2000 and 2008. Models for acquirer and target returns are estimated using takeover premium as the primary explanatory variable, while controlling for characteristics of the deal. Two explicit contributions are made to the extant literature. First, the issue of inconsistent premium measures in preceding studies is addressed by gauging the differential impact of three measures of premium on the models of shareholder returns. Second, the variation in target firm returns between those acquired by public and private firms is assessed.

This study finds that while targets acquired by public firms benefit directly from premiums paid, the relationship between premium and target returns is insignificant when the acquirer is a private organisation. These effects are consistent after controlling for characteristics of the deal. On the acquirer’s side those paying higher premiums do show some underperformance in their returns, but acquirers paying the lowest premiums do not correspondingly perform well. The combined results show that the idea of premiums representing a straightforward wealth transfer from acquirer to the target is something of an oversimplification. Indeed, in the case of targets acquired by private firms the processes at work may be much more subtle than have been previously alluded to. The results also show that the different measures of premium are not substitutes for one another and consequently direct comparisons between research employing disparate measures of premium should be done cautiously.

Item Type: Dissertation (University of Nottingham only)
Depositing User: EP, Services
Date Deposited: 03 Feb 2010 13:44
Last Modified: 23 Oct 2016 23:44

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