The Real Effects of Valuation Mistakes

François Derrien, Johan Hombert, Alexei Ovtchinnikov and Philip Valta
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François Derrien: HEC Paris - Ecole des Hautes Etudes Commerciales
Johan Hombert: HEC Paris - Ecole des Hautes Etudes Commerciales
Alexei Ovtchinnikov: HEC Paris - Ecole des Hautes Etudes Commerciales

Working Papers from HAL

Abstract: We explore how biased investors affect the market for real assets and estimate the resulting efficiency losses. Investors subject to non-proportional thinking ask (too) high merger premia to sell low-price targets and offer (too) low merger premia to buy high-price targets. As a result, M&A premia are lower for high-price targets and both low-and high-price firms are less likely to be acquired than firms in the middle of the price distribution. We test these predictions using a large sample of M&A transactions. We also quantify the value lost because positive-synergy deals do not happen due to non-proportional thinking. Our structural estimation suggests that investors' mistakes reduce the frequency of M&A transactions by about 8% and the value created by the M&A market by about 1%.

Keywords: Merger premium; Acquisition probability; Non-proportional thinking (search for similar items in EconPapers)
Date: 2025-03-04
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Persistent link: https://EconPapers.repec.org/RePEc:hal:wpaper:hal-05187106

DOI: 10.2139/ssrn.5163769

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