FIGURE15.3CumulativeExcessReturntoTargetCompany
Stock
Source:Dennis and McConnell (1986).
Notethatlittlemorethanhalfthepremiumassociatedwith
theacquisitionisalreadyincorporatedinthepricebythetime
theacquisitionisannounced.Thissuggeststhatinformation
aboutacquisitionsisleakedtosomeinvestorswhotradeon
thatinformation.Ontheacquisitiondate,thereisadecided
jump in the stock price but only mild evidence of drift
thereafter.Whenwecategorizeacquisitionsbasedonhowthe
acquiringfirmpaysforthem,wefindthatthestockpricesof
targetfirmstendtodomuchbetterontheannouncementof
cash-basedacquisitions(wheretheacquirerusescashonlyto
pay for the acquired company’s stock) than stock-based
acquisitions.Thepremiumsinhostileacquisitionsarelarger
thanthepremiumsonfriendlymergers,andthepremiumsin