The Real Merger Gains: Correcting for Partial Anticipation

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Assuming mergers are unpredictable, previous studies find they create no value for acquirers, while targets gain a hefty bid premium. This paper proposes a new approach to account for partial anticipation, which allows the parameters of the asset pricing model to change in response to anticipation signals. I find that pre-offer alphas capture signals, and so should be part of merger gains. Using matched-control samples, I rule out that marketwide movements and firms’ ability to time takeovers may drive these findings. Overall, the gains are larger than a traditional market model indicates, and mergers create substantial value for both firms.