Anchoring Bias in TARP Warrant Negotiations
Journal of Economics and Business, Vol. 8, No. 1, pp. 32-42, 2012
36 Pages Posted: 17 Feb 2010 Last revised: 29 Mar 2012
Date Written: March 8, 2011
This paper finds that banks that offered lower opening bids were rewarded with significantly lower warrant repurchase prices in transactions that raised $2.856 billion in 2009. These results were scaled by third-party consultants’ and the Congressional Oversight Panel’s estimates of the warrants’ value. In contrast to the experimental psychology studies on anchoring bias in negotiations, these are real transactions involving large sums of money. This paper finds that larger banks paid significantly higher prices after controlling for other factors, and the U.S. Treasury obtained better prices over time. The results on anchoring bias are strong even after controlling for bank managers’ potential informational advantages over U.S. Treasury negotiators.
Keywords: anchoring bias, behavioral economics, behavioral finance, alternating offers, bailout, banks, banking, bargaining, bids, Capital Purchase Program (CPP), Emergency Economic Stabilization Act (EESA), heuristics, negotiations, offers, options, Troubled Asset Relief Program (TARP), valuation, warrants
JEL Classification: D03, C78, G01, G13, G21, G28, G32, G38
Suggested Citation: Suggested Citation