Reference Point Theory and Pursuit of Deals

Inga Chira and Jeff Madura

The Financial Review, 2015, vol. 50, issue 3, 275-300

Abstract: Target and bidder reference points have separate and joint effects on merger deals. A firm whose stock price is more distant from its 52-week high reference point is less likely to attract bids but has a greater likelihood of being acquired by its own managers (vs unaffiliated bidders). Firm propensity to submit a bid increases if its prevailing stock price is closer to its 52-week high. When both parties’ reference points are close to their current stock prices, they are more willing to complete a deal. Hostile deals result when the bidder's stock price is closer to its reference point.

Date: 2015
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