Takeover Activity And Target Valuations: Feedback Loops In Financial Markets

Asset prices both affect and reflect real decisions. This paper provides evidence of this two-way relationship in the takeover market. The authors find that a firm's discount to its potential value significantly attracts takeovers (the "Trigger effect") - but market expectations of an acquisition cause the discount to shrink (the "Anticipation effect"). By controlling for the simultaneous anticipation effect, they document a markedly stronger trigger effect from prices to takeover probabilities than prior literature - an inter-quartile change in the discount leads to a 4 percentage point increase in acquisition likelihood (compared to a 6% unconditional takeover probability).