Relative Reference Prices and M&A Misvaluations

Review of Behavioral Finance, Vol. 11 Issue: 1, pp.70-97, DOI:10.1108/RBF-04-2018-0036 (2018)

Posted: 14 Jun 2019

See all articles by ZHENLONG LI

ZHENLONG LI

Bank of China

Jie (Michael) Guo

Durham Business School

Panagiotis Andrikopoulos

Centre for Financial and Corporate Integrity (CFCI), Coventry University

Date Written: July 6, 2018

Abstract

Purpose: The purpose of this paper is to examine the misvaluation hypothesis using a relative reference point (RRP) in mergers and acquisitions (M&A) market.

Design/methodology/approach: The paper studies 1,878 M&A deals in the US market announced between January 1985 and December 2014.

Findings: The paper finds that bidders prefer stock payments when the RRP increases. The RRP is positively related to the offer premium and the target announcement returns. Although the RRP is negatively related to the bidder announcement returns, it is positively related to the long-run performance of bidders who time the market with overvalued stocks. The results are consistent with the predictions of the misvaluation hypothesis and reference point (RP) theory.

Originality/value: The authors construct a dynamic valuation framework to explain the misvaluation hypothesis by linking M&As’ misvaluation with RP theory. This paper provides direct evidence that the reference-dependence bias is prevalent for more experienced investors in major corporate investment decisions and offers fresh insights into the method of payment hypothesis.

Keywords: Mergers and acquisitions, Bidder reference point, Misvaluation hypothesis, Target reference point

JEL Classification: G02, G10, G34

Suggested Citation

LI, ZHENLONG and Guo, Jie Michael and Andrikopoulos, Panagiotis, Relative Reference Prices and M&A Misvaluations (July 6, 2018). Review of Behavioral Finance, Vol. 11 Issue: 1, pp.70-97, DOI:10.1108/RBF-04-2018-0036 (2018). Available at SSRN: https://ssrn.com/abstract=3397826

ZHENLONG LI

Bank of China ( email )

1 Lothbury
London, EC2R 7DB
United Kingdom

Jie Michael Guo

Durham Business School ( email )

Old Elvet
Mill Hill Lane
Durham, Durham DH1 3HP
United Kingdom

Panagiotis Andrikopoulos (Contact Author)

Centre for Financial and Corporate Integrity (CFCI), Coventry University ( email )

Priory Street
Coventry, CV1 5FB
United Kingdom
+44(0)247 765 7920 (Phone)

Register to save articles to
your library

Register

Paper statistics

Abstract Views
77
PlumX Metrics