Anchoring in Mergers & Acquisitions (PDF)

Master's Thesis from the year 2012 in the subject Business economics - Investment and Finance, grade: 1.0, Copenhagen Business School, course: Corporate Finance, language: English, abstract: 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.