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Publications
  • October 2012
  • Article
  • Journal of Financial Economics

The Effect of Reference Point Prices on Mergers and Acquisitions

By: Malcolm Baker, Xin Pan and Jeffrey Wurgler
  • Format:Print
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Abstract

Prior stock price peaks of targets affect several aspects of merger and acquisition activity. Offer prices are biased toward recent peak prices although they are economically unremarkable. An offer's probability of acceptance jumps discontinuously when it exceeds a peak price. Conversely, bidder shareholders react more negatively as the offer price is influenced upward toward a peak. Merger waves occur when high returns on the market and likely targets make it easier for bidders to offer a peak price. Parties thus appear to use recent peaks as reference points or anchors to simplify the complex tasks of valuation and negotiation.

Keywords

Mergers and Acquisitions; Stocks; Price; Valuation; Negotiation

Citation

Baker, Malcolm, Xin Pan, and Jeffrey Wurgler. "The Effect of Reference Point Prices on Mergers and Acquisitions." Journal of Financial Economics 106, no. 1 (October 2012): 49–71.
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About The Author

Malcolm P. Baker

Finance
→More Publications

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More from the Authors
  • Leverage and the Beta Anomaly By: Malcolm Baker, Mathias F. Hoeyer and Jeffrey Wurgler
  • Financing the Response to Climate Change: The Pricing and Ownership of U.S. Green Bonds By: Malcolm Baker, Daniel Bergstresser, George Serafeim and Jeffrey Wurgler
  • Detecting Anomalies: The Relevance and Power of Standard Asset Pricing Tests By: Malcolm Baker, Patrick Luo and Ryan Taliaferro
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