Offer Premia in Takeovers

In this paper we develop and test a theoretical framework that models the negotiation and timing processes of corporate acquisitions. The acquisition timing is modelled using real options techniques, and the negotiation process between target and bidder firms is assumed to be a Stackelberg (leader-follower) game with complete information. From the equilibrium strategies, we obtain testable implications for the determinants of the offer premia based on the characteristics of both the bidder and target firms. The three hypotheses related to acquisition premium are tested in a sample of 228 U.S. target firms using an event study methodology and cross sectional regressions. Consistent with the predictions in the model, we find that target volatility and market to book ratios are important determinants of the offer premium. Our findings relating target volatility and target premium are important since these determinants do not arise in existing models of takeovers