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The Behavioral Economics of Mergers and Acquisitions

21 Pages Posted: 16 Oct 2010  

Donald C. Langevoort

Georgetown University Law Center

Date Written: October 15, 2010

Abstract

The world of mergers and acquisitions seems like a setting in which rationality necessarily dominates. There are high stakes, focused and sustained attention, and expert advisers who are repeat players. In the economics and management literature, however, there has been a great deal of research on what might be called “behavioral M&A” - using insights from psychology to explain observed patterns of behavior in the acquisitions marketplace. To date, the law has largely been uninterested in the psychological dynamics of corporate acquisitions. This essay looks at recent research on such issues as the role of overconfidence, hubris, anchoring, etc. in explaining buy-side behavior, as well as comparable influences on the sell-side, and argues that there is a plausible case for behavioral explanations for the value destruction that often occurs because of acquirer overpayment and its spillover effects. It then turns to possible legal lessons, and suggests a normative (maybe ideological) account for why courts hold tightly to the assumption of rationality. In the end, the behavioral literature is likely to be more interesting and important to lawyers, directors and others engaged in the practice of M&A than a cause for judicial revisionism.

Keywords: Psychology, Mergers, Behavioral Law and Economics

JEL Classification: K00, K20, K22, G34

Suggested Citation

Langevoort, Donald C., The Behavioral Economics of Mergers and Acquisitions (October 15, 2010). Transactions, Forthcoming; Georgetown Law and Economics Research Paper No. 10-17. Available at SSRN: https://ssrn.com/abstract=1692777

Donald C. Langevoort (Contact Author)

Georgetown University Law Center ( email )

600 New Jersey Avenue, NW
Washington, DC 20001
United States
202-662-9832 (Phone)
202-662-9412 (Fax)

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