The effect of reference point prices on mergers and acquisitions

The Effect of Reference Point Prices on Mergers and Acquisitions

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Separate higher recent returns and stock market valuations. The from that effect, it seems unlikely that the private potential link to reference price peaks is that higher negotiation would in every case be so knife-edged, ignor- market valuations mean that more targets are trading ing anything that fell, say, 53 weeks prior to announce- closer to their peak prices. Therefore, these reference ment. Having documented that multiple reference points points may become easier to satisfy from the perspective matter, we focus on the week high for simplicity.

In week high is associated with a 3. The bidder wants to offer the lowest ex ante have typical characteristics of targets. A compre- price that the target will accept: The To summarize, the use of reference point prices in bidder is therefore looking for announced price points mergers and acquisitions could shed light on phenomena that will lead to discontinuous jumps in supply.

We that standard theories do not fully explain. The deal suc- cess and market reaction implications of reference points 2. Reference points, loss aversion, and anchoring and are also somewhat unique. Reference points do not shed light on the the sole drivers of value or utility.

The reference point in their Q-theory considers mergers as vehicles for technology theory is derived from the context at hand. This refers to a ger activity that we study. Of course, The related phenomenon of anchoring and adjustment these are broad generalizations, and the literature on is associated with Tversky and Kahneman It refers mergers and acquisitions is vast.

Sections 4—7 report their counterpart about their reservation prices. Section 8 summarizes and concludes.

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The moral of studies of anchoring is that such efforts at deception can succeed y even when these messages are 2. There, the focus is on identifying appear to take advantage of the anchoring phenomenon. Camerer and Malmendier 1 consider reference point effects in organizational For more on synergies and value enhancements, see also Maksimovic and Phillips , Maksimovic, Phillips, and Prabhala economics generally.

Northcraft and Neale show and chapters in Kaplan including Rajan, Volpin, and that the asking price affects estimates of the value of a Zingales The large is a fairly recent price, it seems attainable by target literature on money illusion is based centrally on nominal shareholders even in the absence of a merger.

This logic reference point pricing. This effect is in ence will have in terms of the perception of losses. First, target share- dividends based on loss aversion and framing effects. Degeorge, management scenarios, some of them will consult recent Patel, and Zeckhauser show that executives strain to peak prices as references.

Second, targets seek and exceed salient earnings per share EPS thresholds. Baker attempt to justify the highest possible price. The week point for raising new equity. That they did not sell below a Hart and Moore develop contracting theory recent peak price provides some rhetorical cover. We adjustment from that level becomes the norm.

The management could reassure such stake- realize losses relative to a reference point. While for some holders with the simple argument that the target was investors the reference point is likely to be their purchase worth that price in the past and so, of course, it must be price, i.

Once a target valuation is established by any that could be relevant to merger activity. However, perhaps because of the inherent noisiness of our measure, as well as the fact that it pertains means, the bidder must estimate the minimum price that exclusively to target shareholders rather than a wider range of stake- the target will accept. Slide from Cablevision presentation to shareholders, October 24, The slide compares this bid price to various recent prices including week highs.

Note that the week high was still retained as a critical benchmark despite the consider- 2. Anecdotes from shareholder communications able effect of the offer itself on the price.

It is also cited by the perspective regarding concerns about high prices: We mention a few anecdotal examples potential target in late summer and shares have held here; the remainder of the paper provides a large sample their own despite the thought that many feel a merger analysis, but cannot provide as much color: The week trading generically compared to the week high.

The article failed to shareholders on October 24, But a subsequent article was even that the bid price is at a premium to a variety of week high and low prices, an appeal both to anchoring as an 4 estimate of value and reference point utility. That means that sellers are more likely to The sample of deals is described in Table 1. In other words, the odds the announcement.

Similarly, the week target market of success in our empirical work increase from the numerous index high is the week high stock price market overlapping and reinforcing predictions noted above. The sample consists of merger or acquisition announcements. For only a subset of deals we have information on whether the form of payment is cash, stock, or other, whether the deal is completed or withdrawn, and whether the bidder attitude is hostile, friendly, or neutral from Thomson.

The purpose of scaling these before interest and taxes Compustat: Because not all target and bidder ticity that would result from comparing them in raw companies within the main sample of 7, deals form. See Schwert the target for only 4, deals and of the bidder for only for the relationship between offer premiums and 1, deals. The price volatility and monthly returns of the target For all deals, Thomson gives information on whether not shown are from CRSP.

For a subset of days ending 30 days prior to the announcement date. RET for the appropriate period withdrawn, and whether the bidder attitude is hostile, ending 30 days prior to the announcement date. Market friendly, or neutral. We are able to determine the form of capitalization is price CRSP: Panel C of Table 2 summarizes our battery of controls. As whether the target is ultimately acquired. Basic results Table 2 reports means, standard deviations, medians, and extreme values for deal pricing, outcome variables, We begin by documenting the effect of past peak and control variables.

Regarding prices, the median offer prices on offer prices, because this relationship is central premium is To keep the scale of the x-axis manage- at a 2-year window.

These are all expressed in log terms. For the absolute value. All so we use regressions to verify the incremental impor- continuous variables among these are also Winsorized.

RET centered on the announcement mechanically related to the offer price setting its own date from Thomson. Whether a price The target and bidder characteristics are from standard is at or simply very close to the week high is not sources. SEQ plus deferred taxes and invest- the week high for brevity we focus on a single peak. Means, standard deviations, medians, and extreme values for the pricing of mergers and acquisitions and control variables.

Panel A shows the offer premium, the , , , , , , , and week target high, and the week market index high; in each case the most recent 30 calendar days are excluded from consideration. The offer premium is the offer price from Thomson expressed as a log percentage difference from the CRSP stock price 30 calendar days prior to the announcement date. The X-week target market index high is the X-week high stock price market index over the X weeks ending 30 day prior to the announcement date expressed as a log percentage difference from the CRSP stock price market index 30 calendar days prior to the announcement date.

The CRSP market index is formed using total market value-weighted returns. Panel B shows two other outcome variables: Panel C shows control variables. The target and bidder return on assets, book-to-market equity, and earnings price ratio are from Compustat, expressed in log terms. SEQ plus deferred taxes and investment tax credit Compustat: Other outcome variables Completed 0. Control variables Cash 0. There but also now another feature is revealed, which is that is a slight decline in the density as we approach the many other offers tend to collect just above the week week high from below, and a surge as we pass it.

This is most apparent when we divide offers into bidders could reason that if they were already considering fewer bins in Panel B. Shares are quoted in 16ths, eighths, and decimals in our sample. The p-value is 0. A for discontinuities around randomly chosen past target stock prices. Alternatively, mass here could be the result of stock deals—cash deals 7 One question is why any bidder would locate just below the would have a more uneven mass on the left and right sides of the week high.

Discontinuity at the week high. Panel A uses bins, while Panel B uses bins. But beyond week high. We estimate Gaussian kernel regressions of the noisier and both statistically and economically weaker.

The effect of reference point prices on mergers and acquisitions

In ment, targets that have fallen substantially from their general, the offer premium rises by approximately 3—3. For example, Bear Stearns could hardly example, which may by chance be near the week high. In any case, have used its week high as a reference point in such behavior is likely to make the outcome effects here weaker. However, there are other explanations. The header to Table 3 details premium on the week target high price: As an example, announcement date, with both expressed as a log percentage difference from the CRSP stock price 30 calendar days prior to the announcement consider a hypothetical Target A whose week high date.

The kernel regression has a bandwidth of 10 and 40 estimation more precisely, the 9-week high ending 30 days before points. All else equal, the offer price for Target A will be higher than the offer price for Target B by 4. Extending estimates of Eq. There is also an incremental peak at 65 weeks, with standard errors clustered by month.

We scale the prices extreme to assume that the private negotiation would be by the day lagged price to reduce heteroskedasticity, so knife-edged as to ignore anything beyond precisely 52 but to the extent that investors and boards do not think of weeks prior to announcement. This just over one year. The true size of the period, a variety of peak prices matter. Having shown effect is masked by large outliers in the independent this, we focus on the week high for the rest of the variable, which even when Winsorized includes observa- paper.

We stress that this is for simplicity. The piecewise linear analysis left to do just with one price. They show a magnitude simi- incremental effects at horizons within and slightly lar to that suggested in Fig. As the week high studies of volume and stock returns. This is another effort to control for any effect of with the S-shaped value function of prospect theory, pre-offer runups on offer prices Schwert, Regressions of the offer premium on the week target high price and other incremental high prices. We run ordinary least squares and piecewise linear regressions. Column 1 shows basic OLS results.

Column 2 shows a piecewise linear regression 52WeekHigh. Columns 3 and 4 replace the piecewise 52WeekHigh with the piecewise 13WeekHigh and piecewise residuals for high prices over periods greater than 13 weeks, which we label incremental effects. For example, e1,J is estimated with the following regression: Robust t-statistics with standard errors clustered by month are in parentheses. This indicates, in another explanation holds that the week high price is particularly way, that it is the return since the week high, i. This even in the absence of any synergies.

Focus on the Week high. Regressions of the offer premium on the week target high price. We run piecewise linear regressions: Column 1 includes controls for target past returns, measured in logs. Column 3 includes the high market index price. We evaluate this story market week high. We do not wish to alternative explanation—the bidder cannot hope to recapture dismiss these theories, of course.

These results are available upon request. While some of these controls are compute the total value transfer for our sample. For each important determinants of offer prices, their inclusion the 4, completed deals in our sample, we multiply the does not appear to greatly reduce the effect of peak prices. The results show that despite this high correlation, deal, or 9.

1 The effect of reference point prices on mergers and acquisitions (2010)

Even under the the week high effect comes through. Furthermore, to assumption that the variation in the week high is the extent that the 90th percentile price also serves as an entirely arbitrary, we cannot clearly identify whether this appropriate proxy for fundamental valuation, this test, is overpayment or underpayment without knowing the like that involving the market component of the week stand-alone fundamental value of the targets and the high, also casts doubt on the view that the week high value of synergies from the combinations.

Results are similar for example, that on average the bidder gets a good deal, for the 80th, the 95th, and even the 99th percentile of the but overpays when the target week high is especially target past stock price distribution. Taken together, the large relative to its current price. Because a tender offer is an appeal directly to the deal. Robustness and other subsamples with the target board or its advisors.

A related effect, perhaps, involves the attitude of target management. Tender bidders consider this a lever to appeal directly to target offers are associated with large increases in offer prices, shareholders. We control for seven characteristics of effect, although the interpretation of the results is not the bidder and the target. Large bidders bid more, while unambiguous. This is it is higher, in other words when the target has recently correlated with the week premium and other peaks fallen more sharply.

On the other Thorburn for a more recent survey of restructurings and LBOs.

The Effect of Reference Point Prices on Mergers and Acquisitions - Semantic Scholar

The most related also because most offers are successful. Boone and Mulherin show that on with lower premiums. Column 1 is our baseline column 1 from Table 4. Column 2 adds deal characteristics tender, attitude, form of payment, and bidder identity as controls to the baseline. Column 5 includes all controls. Finally, in unreported results, nomic importance.

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Piecewise linear regressions of the offer premium on the week target high price, for subsamples. Robust t-statistics clustered by month are in parentheses. It thus could of success. The magnitude of the week high and It is catering to investor sentiment directly affects corporate investment.

We run probit regressions: Probit Probit Probit Probit 1 2 3 4 Offer premium: We code the revision as uous increase in success probability. An anchoring-and-adjustment perspective on property pricing decisions ," Organizational Behavior and Human Decision Processes , Elsevier, vol. Babcock, Linda, et al, Evidence from the Marketplace ," Econometrica , Econometric Society, vol. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: See general information about how to correct material in RePEc.

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The effect of reference point prices on mergers and acquisitions.

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