Investor Cost Basis and Takeover Bids
44 Pages Posted: 10 Apr 2012
Date Written: April 9, 2012
This study examines how institutional investors’ cost bases impact takeover offer prices and the likelihood of deal success. We find evidence consistent with the ‘disposition effect’ - a reluctance to realize losses. After controlling for pre-bid prices, cost basis has a positive association with both offer prices and the likelihood of deal acceptance. We find that this behavior is mostly concentrated within short term focused, transient investors. We also use post-bid-rejection returns to provide evidence that the disposition effect, rather than private information, drives the rejection of bids with offer prices that fall short of the average cost basis.
Keywords: Disposition effect, takeovers, institutional investors
JEL Classification: G20, G34
Suggested Citation: Suggested Citation