Target valuation complexity and takeover premiums

Firm- and deal-specific characteristics that complicate estimation of target value simultaneously increase the level and variance of takeover premiums. Specifically, the mean premium is higher and the precision of the premium as a signal is lower (i.e., the error variance higher) when targets belong to the tech industry, when target stock returns are more volatile, when the bidders are larger, and when the cost of deal advising is higher. We also find that deal characteristics that we believe reduce target valuation complexity (transactions involving private bidders or LBOs) result in a lower mean premium and dispersion of premiums. Conversely, deal characteristics that we believe increase target valuation complexity (such as tender offers and deals that take a long time to complete) result in a higher mean premium and higher dispersion of premiums. Overall, characteristics that complicate the valuation of targets feed back into the level of the premium through potential pricing errors and inflate the dis...