Abstract

Providing new evidence derived from a large sample simulation using US exchange-listed firms from 1990 to 2012, this paper contributes to the discussion about 1) the magnitude of target pre-bid abnormal returns (conventionally called the “run-ups”) and 2) the substitution and mark-up pricing relation between pre-bid run-ups and post-bid mark-ups of M&A targets. As random simulation represents the normal scenario (i.e. probability of M&A announcement is unpredictable), we should consider empirically derived critical values of simulation run-ups as the new benchmarks when testing the significance of the target’s pre-bid abnormal return. The fact that only 13% of M&A run-ups could be recognized as abnormal when compared to new benchmarks raises doubts about the traditional approach. In the examination of the relationship between run-ups and mark-ups, a 0.4674 coefficient in the regression of mark-up on run-up using pure random sample makes significant contribution to the debate upon substitution and mark-up pricing hypotheses. If we take 0.4674 as a baseline, the coefficient of the regression is supposed to be smaller if substitution hypothesis outweighs mark-up pricing hypothesis, otherwise this coefficient will be larger than 0.4674. Although the conclusion is still open, findings in this paper and in Schwert (1996) actually tend to support the substitution hypothesis instead of mark-up pricing hypothesis, suggesting pre-bid run-ups do not necessarily cause a higher bidding price for the bidders.