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A Reference Point Theory of Mergers and Acquisitions

47 Pages Posted: 23 Mar 2009 Last revised: 23 Nov 2009

Malcolm P. Baker

Harvard Business School; National Bureau of Economic Research (NBER)

Xin Pan

Harvard University

Jeffrey Wurgler

NYU Stern School of Business; National Bureau of Economic Research (NBER)

Multiple version iconThere are 3 versions of this paper

Date Written: October 16, 2009

Abstract

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.

Keywords: mergers, acquisitions, behavioral finance, behavioral corporate finance, psychology, reference point

JEL Classification: G34

Suggested Citation

Baker, Malcolm P. and Pan, Xin and Wurgler, Jeffrey, A Reference Point Theory of Mergers and Acquisitions (October 16, 2009). AFA 2010 Atlanta Meetings Paper. Available at SSRN: https://ssrn.com/abstract=1364152 or http://dx.doi.org/10.2139/ssrn.1364152

Malcolm P. Baker (Contact Author)

Harvard Business School ( email )

Boston, MA 02163
United States
617-495-6566 (Phone)

HOME PAGE: http://www.people.hbs.edu/mbaker

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
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Xin Pan

Harvard University ( email )

1875 Cambridge Street
Cambridge, MA 02138
United States

Jeffrey A. Wurgler

NYU Stern School of Business ( email )

Stern School of Business
44 West 4th Street, Suite 9-190
New York, NY 10012-1126
United States
212-998-0367 (Phone)
212-995-4233 (Fax)

HOME PAGE: http://www.stern.nyu.edu/~jwurgler/

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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