Several studies show that people are often influenced by reference points which are derived
from the context at hand in estimations or decisions under uncertainty. This analysis deals with
the importance of reference points in the UK and to a lesser extent the European takeover
market. Applying "prospect theory" to equity investment we would predict that shareholders
value gains and losses relative to a reference point in a very human fashion. In a psychological
bias called the "anchoring effect", investors adopt irrelevant salient anchor values as reference
points and are biased towards these. We follow these predictions and, in this thesis, test
historic peak prices as anchor values in corporate takeovers for bidder and target management
as well as shareholders. Firstly, we analyze whether bid prices are affected by the 13-, 26-, 39-,
52- and 65-week high prices. Secondly, we are interested in whether for companies whose
valuation has fallen far from the historic peaks, these anchor values are of lesser relevance,
consistent with the S-shaped form of the prospect theory value function. Finally, bidding above
the historic peak prices is tested and analyzed, in whether this entails a higher probability of
bidding success.
For the purpose of the thesis, a dataset of in total 1602 takeover bids for listed companies in
the United Kingdom (1559), Germany (36) and Poland (7) from Thomson ONE Banker was
constructed. The sample includes bids announced and completed in the time period of 1985 -
2011. Data on stock price history for the target companies was extracted from Thomson
Reuters Datastream. OLS regression, Gaussian Kernel Regression, Piecewise Linear Regression
and Probit regressions are the tools employed to thoroughly analyze the data.
We find that all historic reference values examined exhibit statistically significant impact on the
bidder offer prices with diminishing impact of the reference prices observed for extreme
values. Importantly, no statistically significant evidence that bidding above historic peak prices
secures a higher acceptance rate from target shareholders was discovered. This finding does
not support the reference point thinking for target shareholders. The same is true for offer
price increases. Offer prices below peak prices do not carry a higher probability of being
amended than offer prices ranging above reference prices.
Table of Contents
1 Introduction
1.1 Objective and Contribution
1.2 Research Methodology
1.3 Main Findings
1.4 Limitations
1.5 Structure of the Study
2 Literature Review
2.1 Traditional Merger Theory
2.2 Behavioral Merger Theory
2.3 Reference Point Thinking
2.3.1 Theory
2.3.2 Anchoring in Economics and Finance
2.3.3 Anchoring in Mergers and Acquisitions
3 Hypotheses
4 Sample Composition and Methods
4.1 Dataset
4.2 Definition of Variables
4.3 Methods
4.3.1 Winsorization
4.3.2 Linear Regression
4.3.3 Gaussian Kernel Regression
4.3.4 Piecewise Linear Regression
4.3.5 Probit Regression
4.4 Descriptive Statistics
5 Results and Findings
5.1 Reference Pricing in Takeover Bids
5.1.1 Linear Analysis
5.1.2 Non-linear Effects
5.1.3 Robustness Checks
5.2 Takeover Success and the Adjustment of Takeover Pricing
5.2.1 Reference Prices and Deal Success
5.2.2 Reference Prices and Offer Adjustment
5.2.3 Robustness Checks
5.3 Discussion of Findings
5.4 Limitation of Results
6 Summary and Perspectives
Objective and Core Themes
This thesis examines the influence of psychological biases on corporate takeover activities, specifically testing for "anchoring effects" within the European market. The primary research objective is to determine whether historic peak stock prices serve as reference points that significantly bias bidder offer prices and affect takeover success rates, building upon prospect theory.
- Psychological drivers in mergers and acquisitions (M&A).
- Application of prospect theory to corporate takeover pricing.
- Analysis of historic peak prices (13-week to 65-week highs) as anchor values.
- Empirical evaluation of bid success and offer adjustments.
- Data-driven examination of 1602 takeover bids in the UK, Germany, and Poland.
Excerpt from the Book
2.3 Reference Point Thinking
In order to give the reader a broad understanding of the topic, this section will first go into detail on the phenomenon of anchoring (Tversky & Kahneman, 1974) and prospect theory (Kahneman & Tverksy, 1979), then summarize the evidence found in relation to anchoring in general economic literature and, finally, show how anchoring could have an impact in the pricing of mergers & acquisitions and what empirical evidence was already found in this respect.
The traditional approach to decision making under risk is “Expected Utility Theory” (EUT). Vastly embedded in economic theory, individuals are perceived to act rationally by making decisions according to the following three axioms (Kahneman & Tverksy, 1979):
(1) Expectation: U(x1,p1; ...; xn,pn) = p1u(x1) + ... + pnu(xn)
(2) Asset Integration: (x1,p1; ...; xn,pn) is acceptable at w if the following condition is fulfilled: U(w + x1,p1; ...; w + xn,pn) > u(w)
(3) Risk Aversion: u'' < 0, i.e. the utility function is concave.
With outcome xi, probability pi, where p1 + ... + pn = 1 and individual wealth level before the decision w.
Summary of Chapters
1 Introduction: Provides an overview of the significance of M&A and introduces the research question regarding the impact of anchoring effects on takeover activities.
2 Literature Review: Discusses traditional and behavioral merger theories, focusing on prospect theory and the psychological foundations of reference point thinking.
3 Hypotheses: Outlines six specific testable hypotheses regarding the influence of historic peak prices on bid prices and takeover success.
4 Sample Composition and Methods: Details the dataset of 1602 takeover bids and the statistical methods employed, including OLS, Gaussian Kernel, and Probit regressions.
5 Results and Findings: Presents the empirical analysis, demonstrating significant impacts of historic reference prices on offer premiums while discussing limitations regarding deal success.
6 Summary and Perspectives: Synthesizes the findings and suggests future directions for research in the field of behavioral corporate finance.
Keywords
Anchoring Effect, Mergers & Acquisitions, Prospect Theory, Reference Point, Behavioral Corporate Finance, Bid Price, Takeover Success, Historic Peak Price, 52-Week High, Prospect Theory, Offer Adjustment, Psychological Bias, Empirical Study, European Market, Market for Corporate Control.
Frequently Asked Questions
What is the core focus of this research?
The work investigates whether the psychological "anchoring effect"—where individuals rely too heavily on an initial piece of information—influences corporate takeover prices and shareholder behavior in Europe.
What are the central thematic areas?
The study centers on behavioral corporate finance, specifically applying prospect theory to M&A transactions and examining the role of reference points in financial decision-making.
What is the primary research question?
It asks whether historic peak stock prices (13-week to 65-week highs) act as significant reference points that bias bid prices and impact the success of merger and acquisition attempts.
Which scientific methodology is utilized?
The research uses a deductive, empirical approach, employing statistical tools such as OLS regression, Gaussian Kernel Regression, and Probit regressions to analyze a constructed dataset of 1602 takeover bids.
What topics are covered in the main body?
The main body covers the theoretical foundations of anchoring, the construction of a unique dataset from Thomson ONE Banker, detailed statistical testing of hypotheses, and a discussion of the robustness of the findings.
Which keywords characterize the thesis?
Key terms include Anchoring Effect, M&A, Prospect Theory, Reference Point, Corporate Control, and Bid Premium.
Why was the UK market prioritized in the analysis?
The UK market was prioritized because it represents the majority of takeover activity in the European sample, whereas German and Polish data were too sparse to draw extensive independent conclusions.
Does the study confirm that bidding above historic peaks ensures success?
No, the empirical results do not provide statistically significant evidence that bidding above historic peak prices leads to a higher acceptance rate from target shareholders.
What is the function of the "Winsorization" method mentioned?
Winsorization is used to trim outliers in the dataset to more moderate levels, ensuring that extreme values do not disproportionately distort the statistical analysis.
- Arbeit zitieren
- Jan Gropp (Autor:in), 2012, Anchoring in Mergers & Acquisitions, München, GRIN Verlag, https://www.hausarbeiten.de/document/204433
