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Acquirer reference prices and acquisition performance

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  • Ma, Qingzhong
  • Whidbee, David A.
  • Zhang, Wei

Abstract

In a comprehensive sample of mergers and acquisitions, we find a reference price effect: acquirers earn higher (lower) announcement-period returns when their pre-announcement stock prices are well below (near) their 52-week highs. This reference price effect is stronger in acquisitions of private targets, deals involving greater uncertainty, and acquirers with greater individual investor ownership, and it is reversed in the subsequent year. Further, acquirer reference prices affect bid premia and target announcement-period returns in deals with greater uncertainty in acquirer valuation. The overall evidence is consistent with investors irrationally using 52-week high prices as a measure of acquirer valuation.

Suggested Citation

  • Ma, Qingzhong & Whidbee, David A. & Zhang, Wei, 2019. "Acquirer reference prices and acquisition performance," Journal of Financial Economics, Elsevier, vol. 132(1), pages 175-199.
    • Handle: RePEc:eee:jfinec:v:132:y:2019:i:1:p:175-199
    DOI: 10.1016/j.jfineco.2018.10.004
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    More about this item

    Keywords

    Mergers; Acquisitions; Anchoring; Reference point; Perceived valuation;
    All these keywords.

    JEL classification:

    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies
    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance

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