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

See all articles by Linus Wilson

Linus Wilson

University of Louisiana at Lafayette - College of Business Administration

Date Written: March 8, 2011

Abstract

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

Wilson, Linus, Anchoring Bias in TARP Warrant Negotiations (March 8, 2011). Journal of Economics and Business, Vol. 8, No. 1, pp. 32-42, 2012. Available at SSRN: https://ssrn.com/abstract=1553969 or http://dx.doi.org/10.2139/ssrn.1553969

Linus Wilson (Contact Author)

University of Louisiana at Lafayette - College of Business Administration ( email )

Department of Economics & Finance
214 Hebrard Blvd., Room 326
Lafayette, LA 70504-0200
United States
(337) 482-6209 (Phone)
(337) 482-6675 (Fax)

HOME PAGE: http://www.linuswilson.com

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