Scandinavian Working Papers in Economics

Working Paper Series,
Research Institute of Industrial Economics

No 1038: Initial Offer Precision and M&A Outcomes

Matti Keloharju () and Petri Hukkanen
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Matti Keloharju: Aalto University
Petri Hukkanen: Aalto University

Abstract: Building on recent research in social psychology, this paper analyzes the link between the precision of initial cash offers and M&A outcomes. About one-half of the offers are made at the precision of one or five dollars per share, and an additional one-third at the precision of half dollar or one quarter. The practice of making offers at granular price per share levels is associated with the following unfavorable outcomes for the bidder: (1) higher purchase price for target shares, (2) lower probability to complete the deal, and (3) lower announcement return. A median-sized offer made at the precision of one or five dollars per share is associated with a 45 million dollars higher expected transaction price than one made at a precision greater than one quarter. Our results are consistent with the idea that bidders have learned to avoid making offers at the most granular level.

Keywords: Initial Offer Precision; Mergers and Acquisitions

JEL-codes: G00; G02; G34

32 pages, September 1, 2014

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