Role of psychological reference points in mergers and acquisitions: 52-week high as a reference price in European takeover activity

Abstract

This thesis examines the role of a target company’s 52-week high stock price as a psychological reference point in mergers and acquisitions. It builds on a new strand of M&A literature linking mergers and acquisitions to psychological considerations. The first objective of this thesis is to test whether the 52-week high acts a psychological reference point in European mergers and acquisitions. To provide added credibility to my findings and to alleviate any concerns for the results arising from data mining, I supplement my analysis by interviewing mergers and acquisitions professionals, investment bankers. The second objective of the thesis is to investigate how the 52-week high compares to other potential reference price candidates. The findings should allow comparison of differences between US and European markets, and analysis of practical implications for bidders and targets alike. The data set consists of 3009 acquisitions of majority stakes of public targets in Western Europe during 1997–2008. For an observation to be accepted into the sample, I require that both offer price from SDC M&A database and target stock price development for the 395 days prior to a bid from Thomson Datastream database are available.

Due to a high number of potential extreme outliers, variables are winsorised to make them more robust to outliers. In addition to OLS regressions, I employ a variety of other methods in testing the hypotheses: The nonlinearity in the relation between offer premiums and 52-week highs is inspected using RESET-tests and kernel regressions, and on the basis of these tests a piecewise regression model is adopted. The variation of effect strength across countries, subsamples, and over time is assessed using interaction variables. The impact of surpassing the reference point on deal success is analyzed with probit regressions, and the impact of 52-week high driven bids on bidder shareholder wealth is estimated using a 2-stage least squares specification. Cumulative abnormal returns for bidders are calculated using a standard event study approach. The results provide strong support for the hypotheses. The psychology of reference points draws offer premiums upwards, and surpassing the reference level increases deal success discontinuously. The effect on offer premiums is greater than average in deals with multiple bidders, and below average in deals with financial buyers, deals financed with stock and in the second half of the sample period. Little variation exists across the largest sample countries, and the differences between the smaller countries cannot be explained by regulation. The investment bank interviews confirm the use of past price levels as negotiation arguments, and that psychology can be a consideration especially in price setting. Bidder shareholders perceive the value transfer due to psychology and react negatively. The level of market 52-week high relative to current valuation also influences clustering of merger activity over time, and contributes to the merger wave puzzle. As such, the 52-week period is found to have no special role, but the 52-week high still acts as a proxy for the reference effects in general. Investors are found to have short memories, and overall, their reference considerations seem to be best described by the 1-month average price.