What determines takeover premia: An empirical analysis

We empirically analyze the determinants of takeover premia over the period of 1985-2005 and investigate four different factors affecting these premia over the sample period. Our results can be summarized as follows. First, takeover premia were affected by market misvaluation: they were higher during periods of investor pessimism and market undervaluation and were lower during periods of investor optimism and market overvaluation. Consistent with the above result, takeover premia were also negatively related to prior stock market return and positively related to stock market volatility. Second, takeover premia exhibited momentum, being positively correlated with the premia paid in other takeovers in the recent past. Third, takeovers which involved firms in regulated industries immediately prior to deregulation events were associated with significantly lower premia, while premia paid in takeovers which involved firms in deregulated industries after deregulation events were not significantly different from those in other industries. Finally, takeovers of firms in industries with excess capacity and too many firms (industries going through consolidation) commanded higher premia compared to takeovers in other industries.