Anchoring Bias and Reference Points in European Mergers & Acquisitions Transactions
Author: Rémi Français
Publisher:
Published: 2019
Total Pages:
ISBN-13:
DOWNLOAD EBOOKThis study analyzes how reference points and anchoring bias influence different aspects of the Merger & Acquisitions (M&A) process in Europe. Motivated by the recent findings of Baker, Pan, and Wurgler (2012) in the US, this study uses a sample of 5,081 M&A transactions involving European publicly traded targets with announcement date between 1985 and 2017. The results show that the reference point effect influences various aspects of the M&A-process in Europe but is not as pronounced as in the US. Consistent with related studies, it is found that the relationship between the distance of the target's stock price with its 52-week high and the offer price is positive but nonlinear, that bidding above the 52-week high leads to a moderate jump in the probability of success and that the component of the offer price driven by the 52-week high is associated with lower bidder's announcement returns and thus with overpayment. This study contributes to the existing literature by showing that compared to domestic transactions, cross-border deals in Europe are slightly more affected by the reference point effect, supporting the idea that reference point appeals particularly to decision makers facing increased information asymmetry. Additional tests show that the interaction between the bidder and the target's reference point can predict the method of payment and the management attitude towards the deal in Europe. These results support the idea that managers time the market for their M&A activities, using salient but irrelevant numbers as heuristics for their investment decisions.