Working Paper: NBER ID: w15551
Authors: Malcolm Baker; Xin Pan; Jeffrey Wurgler
Abstract: The use of judgmental anchors or reference points in valuing corporations affects several basic aspects of merger and acquisition activity including offer prices, deal success, market reaction, and merger waves. Offer prices are biased towards the 52-week high, a highly salient but largely irrelevant past price, and the modal offer price is exactly that reference price. An offer's probability of acceptance discontinuously increases when the offer exceeds the 52-week high; conversely, bidder shareholders react increasingly negatively as the offer price is pulled upward toward that price. Merger waves occur when high recent returns on the stock market and on likely targets make it easier for bidders to offer the 52-week high.
Keywords: mergers; acquisitions; reference points; psychological anchors
JEL Codes: G34
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| 52-week high (G14) | offer prices (D44) |
| offer prices > 52-week high (G14) | probability of deal success (C78) |
| offer prices approaching 52-week high (E30) | negative market reactions (G41) |
| 10% increase in offer premium (G19) | 22 basis points decrease in bidder announcement returns (D44) |
| high market valuations (G19) | merger waves (F12) |