Can the Bid Premium Level be Explained by the Individual Accounting Ratios of the Target?

Abstract: This thesis studies the relationship between the targets’s accounting based key ratios and the bid premium in the American manufacturing industry. The sample consists of 406 public transactions during the period 1999-2009. The main hypothesis is that accounting based key ratios can help to explain the bid premium. A statistical approach has been used and a principal component analysis has been conducted in order to reduce the number of accounting ratios to a smaller sample to include in a multivariate regression model. A number of control variables, based on previous research, have been included in the model to isolate the effect of the accounting key ratios. The study finds support for the hypothesis that accounting based key ratios can help to explain the bid premium even if the explanatory level is low. The results indicate that acquirers pay a lower premium for targets with a larger asset base. It is also found that buyers with high excess cash in relation to the market value of the target tend to pay a higher premium and that transactions conducted during 2003-2007 command a lower premium on average than otherwise.