Measuring Deal Premiums in Takeovers

• Author: Serif Aziz Simsir,Harold Mulherin
• Date: 01 March 2015
• DOI: http://doi.org/10.1111/fima.12053
• Published date: 01 March 2015

Measuring Deal Premiums in Takeovers

Harold Mulherin and Serif Aziz Simsir∗

We investigate whether the merger announcement dates provided in the Securities Data Corpo-

ration (SDC) database are handled correctly by researchers performing event studies. We find

that in 24.1% of deals, the popular choice of using the SDC’s “Date Announced” field as the

event date leads to biased estimates of target firm abnormal returns because of earlier abnormal

price movements due to merger-related events such as merger rumors or search-for-buyer types

of announcements. We hand collect the merger-related events from news sources and make the

complete data set publicly available at the Financial Management website.

The wealth effects of mergers on acquirer and targetf irm shareholders are of interest to a broad

body of academics and practitioners from different fields. Academics are typically interested in

the mechanics of takeover markets, which includes the divisionof merger-driven wealth between

the merging firms. Mergers and acquisitions (M&A) advisors estimate the wealth effects of past

mergers, especially on the target firm shareholders, to assess whether their clients are receiving

fair premiums from the proposed transactions.

The traditional method of estimating the wealth effects of mergers is to perform event studies

around the merger announcement dates. This sort of event study methodology relies on two

assumptions to estimate the wealth effects of mergers: 1) the markets are efficient and 2) the

merger announcement about to be released by the merging firm is unknown to outside investors

at the time of the announcement. Only when these conditions are met does the change in merging

firms’ stock prices accurately reflect the wealth effect of the merger in response to the merger

announcement. The vast majority of the empirical M&A literature relies on these twoassumptions

when attempting to identify the factors that shape merger outcomes.

In this paper, we investigate whether the second part of the above-stated premise, merger news

is unknown or unanticipated by outside investors at the time of the announcement, holds around

the primary announcement dates (the “Date Announced” field [DA]) that are recorded in the

Securities Data Corporation (SDC) database, a popular resource used in empirical research.1,2

Wegratefully acknowledge helpful feedback and comments fromRaghavendra Rau (Editor), Basak Tanyeri, BurcuEsmer,

Gul Demirtas, Birgul Arslan, and the seminar participants at Bilkent University.We thank Hasan Burak Arslan and Baris

Korcan Ak fortheir excellent research assistance and Yigit Atilgan for his financial contribution to our project.

∗Harold Mulherin is a Professor in the Department of Finance, Terry College of Business at the University of Georgia

in Athens, GA. Serif Aziz Simsir is an Assistant Professor in the Sabanci Schoolof Management at Sabanci University in

Istanbul, Turkey.

1The SDC database and its DA field are heavily used by academics working in the M&A field. Wedownloaded papers

published in the major finance journals (Financial Management,Journal of Banking and Finance,Journal of Financial

Economics,Journal of Financial and Quantitative Analysis,The Journalof Corporate Finance,The Journal of Finance,

Management Science, and The Reviewof Financial Studies) from January 2006 to May 2011 with JEL code G34 (Mergers

and Acquisitions). Some journals do not report JEL codes; in these cases, we used several M&A-related keywords to

locate the relevant papers. This search resulted in a total of 145 papers, 107 of which relyentirely or partially on SDC to

create the data set. With the exception of a few papers that carefullyidentify the f irst time a target is involvedin merger

negotiations (Ryngaert and Scholten, 2010), the significant majority of papers that perform event studies directly use the

DA field in the SDC database.

2Wedo not analyze the effect of merger anticipation on merging firm stock prices. For a recent discussion of these issues,

see Edmans, Goldstein, and Jiang (2012) and Betton et al. (2013).

Financial Management •Spring 2015 •pages 1 - 14