A Behavioural Corporate Finance Perspective on Mergers and Acquisitions

This thesis addresses the behavioural corporate finance question of how an acquirer’s recent financial performance – primarily ROA and Sales over- or underperformance relative to peers or its own past – influences their valuation after acquisition announcement. The connection is hypothesized to be caused by reference point effects affecting managerial risk propensity: Risk-seeking managers gamble with Mergers and Acquisitions (M&A) and fail to maximize firm value. Extant theory – in the form of Prospect Theory and the Behavioural Theory of the Firm – suggests that such a relationship should exist. Empirical work into the relationship between firms’ positions relative to reference points and subsequent M&A performance has started recently, but the present studies are the first to consider the influence of both an acquirer’s operational over- and underperformance on market value, and accounting figures-based valuations.
First, an event study assumes well-informed investors correctly price shares. A number of significant reference point effect-related relationships are observed, but without a dominant pattern. Second, M&A outcomes are valued based upon a market-to-book ratio decomposition technique from prior literature, to allow for potential stock mispricing. Two distinct effect patterns are revealed: linear and negative for a measure of fundamental value, and an inverted U-shape for a measure of acquirer mispricing. Third, the last study focuses on the Chief Executive Officer (CEO), as main decision maker, to explain the fundamental value outcome better. The negative linear relationship reappears for additional CEO-specific reference point measures. Moreover, some CEO characteristics also influence M&A outcomes directly, as well as in interaction with reference point measures.
Overall, these findings suggest the existence of robust effects of initial positions relative to reference points on acquisition outcome, and the importance of the deciding managers. The results have potential implications for CEOs and further board members, investors, researchers and educators, as well as regulators.