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Abstract

This paper shows a sharp contrast between theoretical predictions of merger negotiations when takeover markup and runup are measured in dollar vs rate terms. It argues that the empirical tests by an influential study cannot reject the hypothesis of a costly feedback loop as the authors claim. Using markup and runup in standardized dollar terms, it provides evidence that is consistent with both hypotheses of rational deal anticipation and a costly feedback loop. This exercise demonstrates the importance and necessity of differentiating regressions with variables in dollar terms and in rate terms to avoid drawing inaccurate or even false conclusions.

5. Concluding remarks

In contrast to BETT's claim, this paper provides theoretical and empirical evidence showing that both hypotheses of rational deal anticipation and a costly feedback loop cannot be rejected. On the theoretical front, we demonstrate that the relationship between the rates of markup and runup can be negative under both hypotheses, which contradicts the theoretical prediction of the monotonic and positive relationship between dollar-value markup and runup under a costly feedback loop hypothesis. On the empirical analysis side, we document that the slope coefficient of the linear regression of standardized markup and runup is (significantly) positive, which is consistent with both hypotheses of rational deal anticipation and a costly feedback loop. More importantly, this paper advocates the importance and necessity of scrutinizing the implications of the regression of variables in dollar terms and that of these variables in their rates, if theory explores the economic mechanisms using dollar-value variables to preserve tractability and an empirical analysis is conducted by the rates of these variables to facilitate cross-sectional comparison. Without thorough scrutiny, it is likely to run the risk of drawing inaccurate or even incorrect conclusions when using empirical results to support or reject the theoretical predictions.