Prospect theory in M&A: Do historical purchase prices affect merger offer premiums and announcement returns?

Research output: Contribution to journalArticlepeer-review

Abstract

Prospect Theory suggests that when the pre-offer market price is below the historical purchase price, target shareholders may be reluctant to accept a merger offer, because it requires realizing nominal losses. In a sample of all U.S. public firm merger offers in 1990–2019, we find that the acquirer partially compensates target shareholders, including retail investors, for their losses via a higher offer premium. Consistent with Prospect Theory, the marginal compensation decreases with loss size and is higher in cash-only deals. We also show that the extra premium paid hurts (boosts) acquirer (target) shareholders' wealth.

Original languageEnglish
Article number100931
JournalJournal of Behavioral and Experimental Finance
Volume42
DOIs
StatePublished - Jun 2024

Bibliographical note

Publisher Copyright:
© 2024 The Authors

Keywords

  • anchoring
  • mergers and acquisitions
  • Prospect Theory
  • reference prices
  • retail investors

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