Investor Cost Basis and Takeover Bids

Abstract

This study examines how institutional investors’ cost bases impact takeover offer prices and the likelihood of deal success. We find evidence consistent with the ‘disposition effect’ - a reluctance to realize losses. After controlling for pre-bid prices, cost basis has a positive association with both offer prices and the likelihood of deal acceptance. We find that this behavior is mostly concentrated within short term focused, transient investors. We also use post-bid-rejection returns to provide evidence that the disposition effect, rather than private information, drives the rejection of bids with offer prices that fall short of the average cost basis.