The Psychology of Pricing in Mergers and Acquisitions
Very interesting paper, talk about investment bankers suffering from anchoring bias.
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Abstract (Via SSRN)
Psychology-driven pricing practices are evident in mergers and acquisitions. In particular, offer prices are highly influenced by the target’s 52-week high stock price. This price likely serves as a psychological anchor—a starting point from which actual bid prices do not sufficiently adjust to reflect only current information (Tversky and Kahneman (1974)). Bidders who pursue targets with 52-week highs that are well above their current prices experience more negative offer announcement effects; their investors appear to perceive such bids as more likely to be overpaying. The probability of deal success is discontinuously increased by offering the target a price above its 52-week high, indicating that psychology-driven prices have real effects.
Introduction (Via WSJ)
With their spreadsheets and teams of math geeks, investment bankers like to show their deal work as a kind of deep science.
Some new research from Harvard pulls back this veneer, showing just how powerful a role psychology plays in pricing deals. In particular, it is one number, the 52-week high for a company’s stock, that matters most. The research is also a reminder to companies looking to sell themselves. They need to act quickly, or risk losing that psychological advantage.
The 52-week high stock price has always had a fetishistic role in merger discussions. By custom, boards are insulted …
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