Do Auctions Induce a Winner's Curse? New Evidence from the Corporate Takeover Market

64 Pages Posted: 18 Mar 2005 Last revised: 2 Jul 2008

See all articles by Audra L. Boone

Audra L. Boone

Texas Christian University - M.J. Neeley School of Business

J. Harold Mulherin

University of Georgia - Department of Banking and Finance

Abstract

We contrast the winner's curse hypothesis and the competitive market hypothesis as potential explanations for the observed returns to bidders in corporate takeovers. The winner's curse hypothesis posits sub-optimal behavior in which winning bidders fail to adapt their strategies to the level of competition and the amount of uncertainty in the takeover environment and predicts that bidder returns will be inversely related to the level of competition in a given deal and to the uncertainty in the value of the target. Our measure of takeover competition comes from a unique data set on the auction process that occurs prior to the announcement of a takeover. In our empirical estimation, we control for the endogeneity between bidder returns and the level of competition in takeover deals. Controlling for endogeneity, we find that the returns to bidders are not significantly related to takeover competition. We also find that uncertainty in the value of the target does not reduce bidder returns. Related analysis indicates that prestigious investment banks do not promote overbidding. Analysis of post-takeover operating performance also fails to find any negative effects of takeover competition. As a whole, the results indicate that the breakeven returns to bidders in corporate takeovers stem not from the winner's curse but from the competitive market for targets that occurs predominantly prior to the public announcement of bids.

Keywords: Mergers and acquisitions, auction, negotiation, bidder returns

JEL Classification: G34, D44

Suggested Citation

Boone, Audra and Mulherin, J. Harold, Do Auctions Induce a Winner's Curse? New Evidence from the Corporate Takeover Market. Journal of Financial Economics (JFE), Forthcoming. Available at SSRN: https://ssrn.com/abstract=686132 or http://dx.doi.org/10.2139/ssrn.686132

Audra Boone (Contact Author)

Texas Christian University - M.J. Neeley School of Business ( email )

Fort Worth, TX 76129
United States

J. Harold Mulherin

University of Georgia - Department of Banking and Finance ( email )

Terry College of Business
Athens, GA 30602-6253
United States
706-542-3644 (Phone)

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