Relative Reference Prices and M&A Misvaluations

Zhenlong Li, Jie (Michael) Guo, Panos Andrikopoulos

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    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
    Issue number1
    Publication statusPublished - 24 May 2019


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

    ASJC Scopus subject areas

    • Accounting
    • Finance
    • Strategy and Management


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