Acquirer Reference Prices and Acquisition Performance

70 Pages Posted: 17 Jan 2016 Last revised: 24 Mar 2018

See all articles by Qingzhong Ma

Qingzhong Ma

California State University, Chico - Department of Finance and Marketing

David A. Whidbee

Washington State University - Department of Finance, Insurance and Real Estate

Wei Athena Zhang

California State University, Chico - Department of Finance and Marketing

Date Written: March 18, 2018

Abstract

In a comprehensive sample of mergers and acquisitions, we find a reference price effect: Acquirers earn higher (lower) announcement-period returns when their pre-announcement stock prices are well below (near) their 52-week highs. This reference price effect is stronger in acquisitions of private targets, deals involving greater uncertainty, and acquirers with greater individual investor ownership, and it is reversed in the subsequent year. Further, acquirer reference prices affect bid premia and target announcement-period returns in deals with greater uncertainty in acquirer valuation. The overall evidence is consistent with investors irrationally using 52-week high prices as a measure of acquirer valuation.

Keywords: Mergers; Acquisitions; Anchoring; Reference point; Perceived valuation.

JEL Classification: G31, G34

Suggested Citation

Ma, Qingzhong and Whidbee, David A. and Zhang, Wei Athena, Acquirer Reference Prices and Acquisition Performance (March 18, 2018). Journal of Financial Economics (JFE), Forthcoming. Available at SSRN: https://ssrn.com/abstract=2716329 or http://dx.doi.org/10.2139/ssrn.2716329

Qingzhong Ma

California State University, Chico - Department of Finance and Marketing ( email )

325 Tehama Hall
Chico, CA 95929
United States

David A. Whidbee (Contact Author)

Washington State University - Department of Finance, Insurance and Real Estate ( email )

Todd 470
Pullman, WA 99164-4746
United States
509-335-3098 (Phone)
509-335-3857 (Fax)

Wei Athena Zhang

California State University, Chico - Department of Finance and Marketing ( email )

United States

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