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The effect of reference point prices on mergers and acquisitions

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  • Baker, Malcolm
  • Pan, Xin
  • Wurgler, Jeffrey

Abstract

Prior stock price peaks of targets affect several aspects of merger and acquisition activity. Offer prices are biased toward recent peak prices although they are economically unremarkable. An offer's probability of acceptance jumps discontinuously when it exceeds a peak price. Conversely, bidder shareholders react more negatively as the offer price is influenced upward toward a peak. Merger waves occur when high returns on the market and likely targets make it easier for bidders to offer a peak price. Parties thus appear to use recent peaks as reference points or anchors to simplify the complex tasks of valuation and negotiation.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Financial Economics.

Volume (Year): 106 (2012)
Issue (Month): 1 ()
Pages: 49-71

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Handle: RePEc:eee:jfinec:v:106:y:2012:i:1:p:49-71

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Web page: http://www.elsevier.com/locate/inca/505576

Related research

Keywords: Mergers; Acquisitions; Offer price; Reference point; Behavioral corporate finance;

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References

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Cited by:
  1. Malcolm Baker & Jeffrey Wurgler, 2012. "Dividends as Reference Points: A Behavioral Signaling Approach," NBER Working Papers 18242, National Bureau of Economic Research, Inc.
  2. Bhootra, Ajay & Hur, Jungshik, 2013. "The timing of 52-week high price and momentum," Journal of Banking & Finance, Elsevier, vol. 37(10), pages 3773-3782.
  3. Li, Xiaoyang, 2013. "Productivity, restructuring, and the gains from takeovers," Journal of Financial Economics, Elsevier, vol. 109(1), pages 250-271.

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