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

Beni Lauterbach, Yevgeny Mugerman and Joshua Shemesh

Journal of Behavioral and Experimental Finance, 2024, vol. 42, issue C

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.

Keywords: mergers and acquisitions; reference prices; anchoring; retail investors; Prospect Theory (search for similar items in EconPapers)
JEL-codes: G34 G41 (search for similar items in EconPapers)
Date: 2024
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Persistent link: https://EconPapers.repec.org/RePEc:eee:beexfi:v:42:y:2024:i:c:s2214635024000467

DOI: 10.1016/j.jbef.2024.100931

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