While stock prices of firms almost always go up immediately after an announcement of a takeover bid by another company, a new study shows that theres a lot of variation in just how far the stock prices may change.
In fact, the study showed that about one-quarter of stock prices actually go higher than the initial bid price announced by the acquiring firm. Overall, investors seem to be savvy about pricing stocks of target firms, said Ralph Walkling, co-author of the study and professor of finance at Ohio State Universitys Fisher College of Business. "We found that the market is very good at determining whether a proposed acquisition deal is going to go through, how long it is going to take, and the final price," he said. Walkling conducted the study with Jan Jindra from Cornerstone Research in Menlo Park, Calif. Their study was published in a recent issue of the Journal of Corporate Finance.
The researchers studied 362 cash tender offers between 1981 and 1995 in the United States in which the bidding firm was attempting to own 100 percent of the target firm. These were all cases in which the target firm was listed on the NYSE, AMEX or NASDAQ exchanges, and the total value of the transaction exceeded $10 million. Walkling said he and Jindra were interested in the "speculation spread" – the difference between how much the acquiring firm bid on the target firms stock, and the price of that stock at the end of the first trading day after the announcement. For example, if the acquiring firm bid $40 a share for the target firms stock, and that stock rose to $38 the day after the announcement, the speculation spread is $2.
Ralph Walkling | EurekAlert!
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