The reference point effect and takeover premiums: Empirical evidence from the United States

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School of Business | Master's thesis
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Date
2017
Major/Subject
Mcode
Degree programme
Finance
Language
en
Pages
72
Series
Abstract
The purpose of the thesis is to study how reference point effect impacts on takeover premiums. Particularly, I examine how precedent offer premiums influence on subsequent takeovers. First, I assess if the magnitude of offer premium in a takeover is impacted by the reference point effect. Second, I study how the reference point effect varies in different circumstances. Third, I analyze if probability of takeover success is influenced by the reference point effect. Lastly, I study how the reference point effect impacts on the bidder market reaction. My data sample consists of 8,537 public takeovers in US between 1984 and 2015. I limit the data sample, among other limitations, to unique bids that are not solicited by the target and that the bidder gains full control. I report the median offer premium of 41.59 percent for the full sample and an average cumulative abnormal return of -1.94 percent for bidder shareholders around the takeover announcement. I find empirical evidences that the reference point effect, or to be more precise the precedent takeover premium, impacts positively on the offer premiums. The results indicate that the bidder might adjust the precedent offer premium slightly upwards to increase attractiveness of the offer. I further find that the reference point effect is nonexistent in hostile takeovers and that the magnitude of the effect varies between different circumstances. I find the reference point effect of precedent premiums to be especially strong in a stock-financed, completed, domestic and friendly takeovers or when the bidder is a strategic buyer. However, the results do not support the hypothesis that probability of takeover success increases when the offer premium exceeds the anchor premium. I argue that the hypothesis is rejected because of other salient point of references, like the purchase price and recent maximum price, are more important for the target shareholders. Finally, I show that the bidder market reaction is connected to the difference of offer premium and anchor premium. Abnormal return of the bidder is positive when the offer premium exceeds the anchor premium and negative when the offer premium is less than anchor premium. This indicates that the bidder shareholders do anchor offer premium to precedent takeovers when assessing valuation of the takeover whereas the target shareholders do not.
Description
Thesis advisor
Puttonen, Vesa
Keywords
mergers and acquisitions, public takeovers, behavior finance, prospect theory, reference point effect, offer premium, market reaction
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