The substantial control premium typically observed in corporate takeovers makes a compelling case for acquiring target shares (a toehold) in the market prior to launching a bid. Moreover, auction theory suggests that toehold bidding may yield a competitive advantage over rival bidders. Nevertheless, with a sample exceeding 10,000 initial control bids for US public targets, we show that toehold bidding has declined steadily since the early 1980s and is now surprisingly rare. At the same time, the average toehold is large when it occurs (20%), and toeholds are the norm in hostile bids. To explain these puzzling observations, we develop and test a two-stage takeover model where attempted merger negotiations are followed by open auction. With optimal bidding, a toehold imposes a cost on target management, causing some targets to (rationally) reject merger negotiations. Optimal toeholds are therefore either zero (to avoid rejection costs) or greater than a threshold (so that toehold benefits offset rejection costs). The toehold threshold estimate averages 9% across initial bidders, reflecting in part the bidder's opportunity loss of a merger termination agreement. In the presence of market liquidity costs, a threshold of this size may well induce a broad range of bidders to select zero toehold. As predicted, the probability of toehold bidding decreases, and the toehold size increases, with the threshold estimate. The model also predicts a relatively high frequency of toehold bidding in hostile bids, as observed. Overall, our test results are consistent with rational bidder behavior with respect to the toehold decision. Abstract Surprisingly, bidders rarely acquire a target stake (toehold) prior to launching control bids, despite paying large takeover premiums. At the same time, toeholds are large when they occur, and toehold bidding is the norm in hostile takeovers. To explain these observations, we develop and test an auction-based takeover model in which toeholds antagonize some (rational) targets, causing these to reject merger negotiations. Optimal toeholds are either zero (to avoid rejection costs) or greater than a threshold so that toehold benefits offset rejection costs. We estimate the toehold threshold, which averages as much as 9% across 10,000+ initial control bids for U.S. public targets, and show that the probability of toehold bidding decreases in the threshold estimate as predicted. The threshold model is also consistent with higher toehold frequencies in hostile bids, and with the steady decline in toehold bidding since the 1980s. * We are grateful for the comments of Eric

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We perform content analysis on a unique sample of 2,074 first-instance published takeover rumors to study how the rationale underlying a publication relates to its credibility and its association with firm returns and rumor accuracy. While most takeover rumors are inaccurate, we find that distinguishing between various justifications of potential takeover activity as provided within the published article serves to predict takeover announcements, subsequent firm abnormal returns, andto a lesser extentpremiums. In addition, we note a clear distinction in results based upon the informative versus speculative nature of the rumor. We interpret this evidence as supportive of our hypothesis that the underlying rationale justifying the release of public information affects firm share prices and aids in predictability. JEL Classification codes: G14; G34; G30 * The authors would like to thank the Fonds Quebecois de la Recherche sur la Societe et la Culture (2015-NP-182891), the Social Sciences and Humanities Research Council (430-2013-0502), as well as Concordia University (seed funding program) for the funding of this research.

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Do preoffer target stock price runups increase bidder takeover costs? We present model-based tests of this issue assuming runups are caused by signals that inform investors about potential takeover synergies. Rational deal anticipation implies a relation between target runups and markups (offer value minus runup) that is greater than minus one-for-one and inherently nonlinear. If merger negotiations force bidders to raise the offer with the runup-a costly feedback loop where bidders pay twice for anticipated target synergies-markups become strictly increasing in runups. Large-sample tests support rational deal anticipation in runups while rejecting the costly feedback loop. For helpful comments and discussions, we thank the Editor (Cam Harvey), an Associate Editor and two anonymous referees, Laurent Bach, Eric de Bodt, Michael Lemmon, Pablo Moran, and Annette Poulsen. This paper, and an early precursor entitled "Markup pricing revisited", also benetted from comments received in faculty seminars at the following universities and business schools: Aarhus, Adelaide, Arizona, Boston, Calgary, Cambridge, City University of Hong Kong, Colorado, Connecticut, Dartmouth, Georgia, HEC Montreal, Lille, LBS, Lund, Maryland, Melbourne, Navarra, Norwegian School of Economics, BI Norwegian School of Management, Notre Dame, Oregon, Oxford, SMU, Stavanger, Texas A&M, Texas Tech, Tilburg, Tulane, York, and UBC. The paper was also presented at the association meetings of the AFA, EFA, EFMA, FMA, FMAI, and the NFA, as well as at the Paris Spring Corporate Finance Conference and the UBC Summer Finance Conference. Partial nancial support from Tuck's Lindenauer Center for Corporate Governance is gratefully acknowledged. © Sandra Betton, B. Espen Eckbo, Rex Thompson and Karin S. Thorburn 2013. All rights reserved. Short sections of text, not to exceed two paragraphs, may be quoted without explicit permission provided that full credit, including © notice, is given to the source.Electronic copy available at: http://ssrn.com/abstract=1835073Abstract Do pre-offer target stock price runups increase bidder takeover costs? We present modelbased tests of this issue assuming runups are caused by signals that inform investors about potential takeover synergies. Rational deal anticipation implies a relation between target runups and markups (offer value less the runup) that is greater than minus one-forone and inherently nonlinear. If merger negotiations force bidders to raise the offer with the runup ---a costly feedback loop where bidders pay twice for anticipated target synergies ---markups become strictly increasing in runups. Large-sample tests support rational deal anticipation in runups while strongly rejecting the costly feedback loop.