Sold below value? Why some targets accept very low and even negative takeover premiums.

In our sample of 1,937 US mergers (1995 to 2011), 8.4 percent of all targets received oers with negative premiums where the initial bid undercuts the pre-announcement market price. We theoretically show that target overvaluation, market liquidity and `hidden earnouts', where target shareholders participate in the bidder's share of joint synergies, can explain negative premiums. Empirical tests provide substantial support for overvaluation and hidden earnouts, but only weak support for market liquidity. Moreover, we show that the theory for negative premiums generalizes to positive premiums and predicts lower values for most premiums below the median.