Merger Activity, Stock Prices, and Measuring Gains from M&A

With 5% of U.S. public firms acquired annually, rational expectations perpetually embed a significant portion of acquisition gains into firms' stock prices long before a takeover. We estimate 10% of a typical target's pre-deal price is attributable to general merger anticipation. The unobserved (anticipated) portion of the merger premium is roughly one-third of the observed premium, implying M&A event studies greatly understate merger gains. More broadly, since 1990 takeover premiums comprise 24% of cash flows to investors in public firms. We show a strong link from merger activity to market returns, with each dollar of announced merger premiums associated with up to a $44 increase in aggregate stock market valuation