The market’s (ir)rationality: Evidence of reference points on M&A and the role of the bidder’s investment bank reputation

A great number of studies documented bidder merger losses around the merger announcement date. The majority of the determinants documented are considered rational, however, a great line of literature has increasingly focused on the effect of past stock prices on decision makers e.g. 52-week high. This implies that there is a notion of irrationality inherent to decision makers when facing uncertainty. This study aims to find, through the anchoring-and-adjustment model and from a (stock) market perspective a new determinant for these negative bidder merger gains. In addition, this study includes the bidder’s investment bank reputation as a (statistical) moderator in the main relationship because they act as brokers decreasing information asymmetry and uncertainty. This quantitative study has collected a sample of 947 M&A deals during 1st January 1991 until 31st December 2007. Through ordinary least square (OLS) regressions two hypotheses have been tested. More specifically, what is the effect of the 52-week high on the bidder merger gains, and how this relationship is moderated by the bidder investment bank reputation? Surprisingly, the results empirically document a positive effect of the anchor (52-week high) in the bidder merger gains and that low-tier investment banks might provide higher bidder merger gains than their top-tier counterparties. The results of this study contradict a previous research and suggests that for investigating the anchoring effect more focus should be allocated into the run-up period plus the timing after the announcement altogether. In addition, the relative determinants should be considered.Technology, Policy and ManagementEconomics and InnovationFinance and Economic