Why do acquiring firms pay high premiums to takeover target shareholders

Abstract

The purpose of this paper is to explore empirically the relationship between several factors reported in the literature to affect the premium received by takeover target shareholders. Using a sample of 190 successful takeovers during the period 1995-2005, our results suggest that high leveraged target firms' shareholders receive, on average, 13.34 percent more premium than stockholders of low leveraged target firms. Controlling for leverage, target firms which have high leverage and oppose the takeover receive significantly larger premiums than those with high leverage but do not oppose the takeover. Moreover, controlling for the size of managerial ownership in target firms, the association between leverage and premiums becomes more significant when managerial ownership is high and less significant when it is low.