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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.

Suggested Citation

  • Baker, Malcolm & Pan, Xin & Wurgler, Jeffrey, 2012. "The effect of reference point prices on mergers and acquisitions," Journal of Financial Economics, Elsevier, vol. 106(1), pages 49-71.
  • Handle: RePEc:eee:jfinec:v:106:y:2012:i:1:p:49-71
    DOI: 10.1016/j.jfineco.2012.04.010
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    More about this item

    Keywords

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

    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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