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The Real Effects of Valuation Mistakes

Author

Listed:
  • François Derrien

    (HEC Paris - Ecole des Hautes Etudes Commerciales)

  • Johan Hombert

    (HEC Paris - Ecole des Hautes Etudes Commerciales)

  • Alexei Ovtchinnikov

    (HEC Paris - Ecole des Hautes Etudes Commerciales)

  • Philip Valta

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

  • François Derrien & Johan Hombert & Alexei Ovtchinnikov & Philip Valta, 2025. "The Real Effects of Valuation Mistakes," Working Papers hal-05187106, HAL.
    • Handle: RePEc:hal:wpaper:hal-05187106
    DOI: 10.2139/ssrn.5163769
    as

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