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A Reference Point Theory of Mergers and Acquisitions

  • Malcolm Baker
  • Xin Pan
  • Jeffrey Wurgler

The use of judgmental anchors or reference points in valuing corporations affects several basic aspects of merger and acquisition activity including offer prices, deal success, market reaction, and merger waves. Offer prices are biased towards the 52-week high, a highly salient but largely irrelevant past price, and the modal offer price is exactly that reference price. An offer's probability of acceptance discontinuously increases when the offer exceeds the 52-week high; conversely, bidder shareholders react increasingly negatively as the offer price is pulled upward toward that price. Merger waves occur when high recent returns on the stock market and on likely targets make it easier for bidders to offer the 52-week high.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 15551.

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Date of creation: Dec 2009
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Publication status: published as Baker, Malcolm, Xin Pan, and Jeffrey Wurgler. "The Effect of Reference Point Prices on Mergers and Acquisitions." Journal of Financial Economics 106, no. 1 (October 2012): 49–71.
Handle: RePEc:nbr:nberwo:15551
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