Social connections, reference point and acquisition premium

Abstract

This paper examines the impact of acquirer-target social connections along with the target 52-week high (Baker et al., 2012) on acquisition premiums. We show that acquisition premium is more sensitive to first-degree connection than the reference point, suggesting that information is the main driving force for determining acquisition premiums. The findings also indicate that connected directors are more likely to favour firms where they hold higher positions and negotiate favourable premiums. Acquirers pay lower premiums when target directors are retained in the new entity. Connected acquirers are also more likely to finance their deals with equity. Overall, this paper provides support to the information flow hypothesis that acquirers with social connections have better access to target information and enhanced bargaining power in negotiations.