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Relative Reference Prices and M&A Misvaluations

Li, Z.; Guo, M.; Andrikopoulos, P.

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Authors

Z. Li

P. Andrikopoulos



Abstract

Purpose: The purpose of this paper is to examine the misvaluation hypothesis using a relative reference point (RRP) in mergers and acquisitions (M&A) market. Design/methodology/approach: The paper studies 1,878 M&A deals in the US market announced between January 1985 and December 2014. Findings: The paper finds that bidders prefer stock payments when the RRP increases. The RRP is positively related to the offer premium and the target announcement returns. Although the RRP is negatively related to the bidder announcement returns, it is positively related to the long-run performance of bidders who time the market with overvalued stocks. The results are consistent with the predictions of the misvaluation hypothesis and reference point (RP) theory. Originality/value: The authors construct a dynamic valuation framework to explain the misvaluation hypothesis by linking M&As’ misvaluation with RP theory. This paper provides direct evidence that the reference-dependence bias is prevalent for more experienced investors in major corporate investment decisions and offers fresh insights into the method of payment hypothesis.

Citation

Li, Z., Guo, M., & Andrikopoulos, P. (2019). Relative Reference Prices and M&A Misvaluations. Review of Behavioural Finance, 11(1), https://doi.org/10.1108/rbf-04-2018-0036

Journal Article Type Article
Acceptance Date Jul 7, 2018
Online Publication Date Jun 5, 2019
Publication Date Jun 5, 2019
Deposit Date Jul 7, 2018
Publicly Available Date Mar 29, 2024
Journal Review of Behavioural Finance
Print ISSN 1940-5979
Publisher Emerald
Peer Reviewed Peer Reviewed
Volume 11
Issue 1
DOI https://doi.org/10.1108/rbf-04-2018-0036
Public URL https://durham-repository.worktribe.com/output/1326549

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Copyright Statement
This article is © Emerald Group Publishing and permission has been granted for this version to appear here (http://dro.dur.ac.uk/25470). Emerald does not grant permission for this article to be further copied/distributed or hosted elsewhere without the express permission from Emerald Group Publishing Limited.




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