Markup Pricing Revisited

We examine whether pre-bid target stock price runups lower bidder takeover gains and deter short-term toehold purchases in the runup period. A dollar increase in the runup raises the initial offer price by $0.80 (markup pricing). Bidder gains, while decreasing in offer price markups, are increasing in runups, suggesting that runups are interpreted by the negotiating parties as reflecting increases in target stand-alone values. We also show that short-term toehold purchases increase runups. However, when purchased by the initial bidder (as opposed to by other investors), short-term toeholds lower markups, possibly because they provide evidence to the target that the runup anticipates the pending offer premium (supporting substitution between the runup and the markup). We conclude that markup pricing per se is unlikely to deter short-term toehold aquisitions.