Variables in dollar terms versus in rate terms: The case of market feedback on merger negotiations

This paper shows a sharp contrast between theoretical predictions of merger negotiations when takeover markup and runup are measured in dollar vs rate terms. It argues that the empirical tests by an influential study cannot reject the hypothesis of a costly feedback loop as the authors claim. Using markup and runup in standardized dollar terms, it provides evidence that is consistent with both hypotheses of rational deal anticipation and a costly feedback loop. This exercise demonstrates the importance and necessity of differentiating regressions with variables in dollar terms and in rate terms to avoid drawing inaccurate or even false conclusions.