Learning from Market Feedback: Evidence from Mergers & Acquisitions

Targets of merger deals experience signficant value increases in the days leading up to the announcement of a deal. Existing literature attributes the run up in target value solely to deal anticipation and, as such, the run-up is regarded as being uninformative about the surplus that can be generated from the deal. I find empirical evidence that target runup is positively related to bidder gain and to deal completion probability and that these results are strongest when the level of uncertainty regarding deal surplus is high. The results suggest that target runup reflects the market consensus about the deal surplus and that this independent outside signal of deal surplus allows bidder insiders to update their priors and improve their decision making in regards to the deal. These results add to our understanding of managerial learning from the market and the role of the market in determining the outcome of privately negotiated deals