Retail and Institutional Investors’ Historical Purchase Prices: Do they Affect Merger Offer Premiums and Deal Response?
69 Pages Posted: 16 Jun 2021 Last revised: 23 Mar 2023
Date Written: March 21, 2023
Abstract
This paper examines whether the prices target shareholders originally paid for their shares affect merger deals. Specifically, when the pre-offer market price is below the historical purchase price, target shareholders may be reluctant to realize their nominal loss. In a sample of all U.S. public firm merger offers in 1990–2019, we find that nominal target shareholder losses are associated with higher premiums and negative acquirer announcement returns. Both institutional and retail investors losses are compensated and, consistent with realization utility, the effect is stronger in cash-only deals. Our results suggest that behavioral reference prices are influential during pre-bid negotiations.
Keywords: mergers and acquisitions; reference prices; anchoring; retail investors: Prospect Theory.
JEL Classification: G34, G41
Suggested Citation: Suggested Citation