Espen Eckbo (Tuck School of Business at Dartmouth) presenting 'Deal anticipation and markup pricing in takeovers: A structural analysis' - Abstract: Takeover rumors cause the market to anticipate the expected offer premium, resulting in a pre-bid target stock price runup. A runup may also reflect a surprise increase in he target's stand-alone value, possibly prompting the target to demand a markup of the offer price. Common sense suggests that bidders should rarely agree to markups: after all, runups tend to occur amid intense market rumors and, given target incentives, offering a markup carries a substantial risk of 'paying twice'. However, the takeover literature reports that o er premiums and runups are highly positively correlated, as if costly markup pricing exists as the norm. To address this puzzle, we present a structural analysis of the deal anticipation hypothesis which shows that the relation between runups, markups and premiums is highly nonlinear when synergy gains vary in the sample. Thus, earlier linear projections of premiums on runups do not properly test the deal anticipation hypothesis for runups. Furthermore, our large-sample evidence rejects the existence of costly markup pricing in the data. While offer premiums cause runups, there is little evidence that runups feed back into higher offer premiums.