Reference Point Theory and Pursuit of Deals

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.

Relative reference prices and M&A misvaluations

“…The RRP effect remains strong for both successful and unsuccessful M&A deals, suggesting that the RRP serves as a valuation benchmark for deal initiation. This result contradicts the suggestion of Chira and Madura (2015) that the two firms involved with a higher price relative to their reference points are likely to complete the deal, while those with a lower price relative to their reference points are less willing to complete the deal, in that the firms see large disadvantages in the negotiation position. 24 Therefore, it has become evident that the RRP effect on offer premiums is strong regardless of different subsamples by deal characteristics.…”

“…The market would look at the bidder reference point, for it is relevant price information readily available for the public. Chira and Madura (2015) argue that bidders also assess their value according to the bidder reference point. They are unwilling to pay with stocks when the current price deviates greatly from the 52-week high price, which is a sign for undervaluation.…”

“…Targets negotiate for larger offer premiums when their current price deviates greatly from their 52-week high price. Similarly, Chira and Madura (2015), who focused on the reference point effect on acquisition probability, argued that bidders are unwilling to bid for a firm whose price is heavily discounted from its 52-week high price. This suggests that targets would frustrate bidders with large offer premiums when targets are undervalued according to the reference point.…”

Anchoring in Mergers and Acquisitions: Does the Regulatory Environment Matter?

“…Our article contributes to three important areas in the finance literature. First, we contribute to the M&A literature and complement prior studies (Baker et al, 2012; Chira & Madura, 2015; Niinivaara, 2010 and more) that provide evidence on the 52-week anchoring effect in M&A markets around the world. Second, we contribute to regulation and governance literature, and provide new evidence that the 52-week anchoring effect persists even in the face of different regulatory anchors.…”

“…Bidders and targets justify the 52-week high anchor because they expect prospective synergies to surpass previous stock market highs. This 52-week anchoring effect is ubiquitous in various M&A markets around the world, including the United States (Baker et al, 2012; Chira & Madura, 2015; Ma, Wang, & Zhang, 2017), Europe (Niinivaara, 2010), Japan, and Russia (Stepanova, Savelyev, & Shaikhutdinova, 2018). Hence, given the setting of the Indian takeover regulation, we provide evidence beyond simply testing the efficacy of the 52-week anchoring effect as a global phenomenon, for several reasons.…”