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Shareholders’ expectations, aspiration levels, and mergers

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  • E. Diecidue
  • Jeroen van de Ven
  • G.U. Weitzel

Abstract

This paper offers a new explanation of value-reducing mergers and stock market driven takeovers by introducing recent research on aspiration levels and individual decision making under risk. If market valuation constitutes an aspiration level for managers, we show that managers may be tempted to seek riskier mergers in order to meet shareholder optimism. Such merger seeking behavior increases in bidder overvaluation and can also favor acquisitions when the expected value of takeovers is lower than alternative investments. The paper provides support for several empirical findings and complements existing market-timing models as its predictions are decoupled from equity offers and are independent from the means of payment.

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File URL: http://dspace.library.uu.nl/bitstream/handle/1874/31452/08-06.pdf
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Bibliographic Info

Paper provided by Utrecht School of Economics in its series Working Papers with number 08-06.

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Length: 22 pages
Date of creation: 2008
Date of revision:
Handle: RePEc:use:tkiwps:0806

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Keywords: aspiration level; mergers and acquisitions; market-driven takeovers; overvaluation;

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References

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