Table 10

Regressions of the total abnormal stock return received by the stockholders of the first bidder firm (Premiumib) on the pre-bid runup for the target firm (Runupi) and for the bidder firm (Runupib) for various samples of successful mergers and tender offers for exchange-listed target firms, 1975-91:

Premiumib = a + b Runupib + c Runupi + ui,

where Premiumib = Runupib + Markupib. Runupib (Runupi) is the cumulative abnormal return to the bidder's (target's) stock from day -42 to day -1 relative to the first bid. Markupib is the cumulative abnormal return to the bidder's stock from the day of the first bid through delisting or 126 trading days after the first bid, whichever comes first. This regression shows the effect of pre-bid runup in the target's stock price on the price of the bidder's stock. If the hubris hypothesis that bidders pay too much is related to the size of the target's runup, the estimates of c should be reliably negative. S(u) is the standard error of the regression and Rsquared is the adjusted coefficient of determination. White's (1980) heteroskedasticity-consistent standard errors are used to compute the t-statistics.

SampleProportion of SampleSample Size, N Bidder Runup Coef, bT-statistic, t(b=1) Target Runup Coef, cT-statistic, t(c=0) Constant, aT-statistic, t(a=0) S(u)Rsquared
All deals9150.9190.980.0030.060.0090.990.1460.107
Main sample7900.8741.460.0561.360.0161.780.1470.116
Successful84.30%6660.8931.120.0591.300.0090.960.1530.147
Unsuccessful15.70%1240.8011.080.0040.040.0512.100.1160.051
News42.70%3370.8990.630.0721.150.0493.130.1810.095
No news57.30%4530.8541.530.0781.520.0020.220.1220.131
Pill11.80%931.1110.350.0380.280.0090.360.1260.239
No pill88.20%6970.8361.900.0631.500.0191.850.1500.099
Auction20.80%1641.2071.000.2532.290.0020.100.1460.199
No auction79.20%6260.7802.500.1172.800.0171.660.1470.094
Tender offers40.30%3180.9550.310.0100.130.0271.590.1750.185
Mergers59.70%4720.8281.660.0641.370.0393.620.1280.069
MBOs2.90%230.9480.260.0950.620.0781.870.1440.068
Cash49.10%3880.9230.580.0620.910.0020.150.1550.155
Equity26.30%2080.6882.270.0110.180.0372.340.1100.098
Insider10.60%841.0010.000.1430.930.0280.980.2000.194
No insider89.40%7060.8611.500.0491.160.0161.690.1410.106

© Copyright 1996, G. William Schwert
Return to Markup Pricing Page