Managerial Gambling Attitudes: Evidence from Bank Acquisitions

Abstract

This study investigates the implications of the cumulative prospect theory in the context of U.S. bank acquisitions, with particular emphasis on its probability weighting component. Specifically, we examine whether gambling attitudes matter in U.S. bank takeover decisions. The evidence demonstrates that offer price premiums and target announcement returns are much higher in bank takeover transactions involving targets with gambling (lottery) features (high skewness, high volatility, and low price). In addition, we find that synergies and bidder announcement returns are lower in lottery-type acquisitions. The patterns we document are stronger when bidding banks are bigger, target banks are smaller, investor sentiment is above the median, and the Chicago Fed National Activity Index is negative. Consistent with the prediction of the house money effect of Thaler and Johnson (1990), we also find gambling to be pronounced when acquiring banks have performed well in the past. Overall, the results indicate that banking acquisitions are influenced by gambling attitudes.

Keywords: Bank Acquisitions, Prospect Theory, Gambling

JEL Classification: G34, G14, G21