Takeovers and Divergence of Investor Opinion

Abstract

In this paper, we develop and test five hypotheses relating the takeover premium paid for a target to the investors' divergence of opinion on the target's equity value. For a sample of acquisitions of publicly traded targets, we show that the total takeover premium is higher when investors have higher divergence of opinion on the target's value. Second, we decompose total takeover premium into a stock price runup for the target prior to the takeover announcement and a post-announcement markup. We show that both the target's stock price runup and the post-announcement markup increase with an increase in the divergence of opinion on the target's value. Third, we show that the post-announcement markup and the pre-announcement runup could be positively correlated since both are positively related to the divergence of opinion on the target's value. Fourth, we show that the post-announcement markup decreases with an increase in bidder toehold. Finally, we show that a positive sentiment shock at the market level increases the divergence of opinion on the target's equity value, thereby increasing the total takeover premium, the target runup, and the post-announcement markup. Our results highlight the importance of the divergence of investor opinion in explaining the takeover premium, the pre-announcement runup and the post-announcement markup in mergers and acquisitions.