Relative Reference Prices and M&A Misvaluations

Zhenlong Li, Jie (Michael) Guo, Panos Andrikopoulos

Research output: Contribution to journalArticle

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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.

Original languageEnglish
Pages (from-to)70-97
Number of pages28
JournalReview of Behavioural Finance
Volume11
Issue number1
DOIs
Publication statusPublished - 24 May 2019

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Reference point
Reference price
Announcement returns
Mergers and acquisitions
Design methodology
Investors
Long-run performance
Prediction
Method of payment
Corporate investment
Investment decision
Payment
Reference dependence
Premium

Keywords

  • Bidder reference point
  • Mergers and acquisitions
  • Misvaluation hypothesis
  • Target reference point

ASJC Scopus subject areas

  • Accounting
  • Finance
  • Strategy and Management

Cite this

Relative Reference Prices and M&A Misvaluations. / Li, Zhenlong; Guo, Jie (Michael); Andrikopoulos, Panos.

In: Review of Behavioural Finance, Vol. 11, No. 1, 24.05.2019, p. 70-97.

Research output: Contribution to journalArticle

Li, Zhenlong ; Guo, Jie (Michael) ; Andrikopoulos, Panos. / Relative Reference Prices and M&A Misvaluations. In: Review of Behavioural Finance. 2019 ; Vol. 11, No. 1. pp. 70-97.
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