AN EMPIRICAL INVESTIGATION OF MERGER PREMIUMS

Regardless of their motives, acquiring firms almost always have to offer a premium to the shareholders of the acquired firm in acquisitions. That is, the value of the securities or cash paid by the acquirers is higher than the premerger market price of the acquired firm's common stock. The size of the merger premiums, as a percentage of the pre‐merger market price of the acquired firm's common stock, could vary from 20 per cent to 115 per cent. Several empirical studies examining the factors that determine the size of merger premiums have had limited success. Since the merger premium could affect the probability of success of a merger attempt and the wealth of the shareholders of both the acquiring and the acquired firms, continued efforts to improve our understanding of merger premium determination is essential. This paper investigates empirically the premiums paid in 66 mergers consummated between 1975 and 1979.