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The Real Effects of Valuation Mistakes: Estimates from Mergers and Acquisitions

Author

Listed:
  • Derrien, François

    (HEC Paris)

  • Hombert, Johan

    (HEC Paris)

  • Ovtchinnikov, Alexei V.

    (HEC Paris)

  • Valta, Philip

    (University of Bern)

Abstract

We explore how biased investors affect the market for real assets and estimate the resulting efficiency losses. Investors subject to non-proportional thinking ask (too) high merger premia to sell low-price targets and offer (too) low merger premia to buy high-price targets. As a result, M&A premia are lower for high-price targets and both low-and high-price firms are less likely to be acquired than firms in the middle of the price distribution. We test these predictions using a large sample of M&A transactions. We also quantify the value lost because positive-synergy deals do not happen due to non-proportional thinking. Our structural estimation suggests that investors' mistakes reduce the frequency of M&A transactions by about 8% and the value created by the M&A market by about 1%.

Suggested Citation

  • Derrien, François & Hombert, Johan & Ovtchinnikov, Alexei V. & Valta, Philip, 2025. "The Real Effects of Valuation Mistakes: Estimates from Mergers and Acquisitions," HEC Research Papers Series 1553, HEC Paris.
    • Handle: RePEc:ebg:heccah:1553
    DOI: 10.2139/ssrn.5163769
    as

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    More about this item

    Keywords

    Merger premium; Acquisition probability; Non-proportional thinking;
    All these keywords.

    JEL classification:

    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance
    • G41 - Financial Economics - - Behavioral Finance - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making in Financial Markets

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