Finance Discipline Group
UTS Business School
University of Technology, Sydney

Working Paper Series

Takeover Bids, Share Prices, and the Expected Value Hypothesis
Author(s): Elaine Hutson and Graham Partington
Date of publication: April 1994
Working paper number: 36
This paper examines the relationship between the price bid for a takeover target, the probability of the bid suceeding and the target's price over the course of the bid. We test and reject Samuelson and Rosenthal's (1986) expected value hypothesis. We find that over the bid, the price of the target of a successful bid typically rises towards the bid price, but is not observed to converge with the bid price. The lack of observed convergence appears to be due to an early cessation of trading in many of the bids that succeed. In the case of bids that fail, the target's share price is typically observed to rise above the bid price early in the bid. We consider several explanations for this, and suggest that the expectation of a subsequent bid is the most plausible explanation. This is supported by our empirical evidence. We also find that in the cases where the bid fails, early cessation of trading did not occur in the majority of cases.
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