On the Role of Acquisition Premium in Acquisition Research

Several studies argue that paying high acquisition premia is value destroying for acquirer shareholders. There are studies that have even used the size of premium as a measure of low-quality decision making. This paper departs from the earlier research and shows that acquisition premia may be justified when target firms' resources are difficult for the market to value. An analysis of a sample of 458 acquisitions demonstrates that although higher premia are paid for R&D-related assets, the premia do not cause negative abnormal returns. Abnormal returns are more strongly affected by the overall target price levels independent of premia. Copyright © 2007 John Wiley & Sons, Ltd.