Behavioral finance and MenA
23 important questions on Behavioral finance and MenA
What are the 3 tested theories in Rhodes-Kropf and Viswanathan (2004)
Neoclassical Q theory - more productive use of assets.
Rhodes-Kropf and Viswanathan (2004) - correlated asymmetric information.
Shleifer and Vishny (2003) - irrational investors and self-interested managers.
In Rhodes-Kropf, Robinson and Viswanathan . describe the Theoretical background There is no misvaluation. Neoclassical Q theory:
-Mergers are response to shocks that create reorganizational opportunities.
-Dispersion in Tobin’s Q reflect opportunities for organizational change.
-Well-positioned firms with high M/B ratio acquire low M/B targets.
Rhodes-Kropf and Viswanathan (2004):There is misvaluation. Rational explanation why targets accept an overvalued stock as acquisition currency.
Name 4 such reasons and who brought these reasons forward?
Cannot distinguish between firm-specific mispricing and market overvaluation.
Fiduciary responsibility to accept any offer higher than stand alone firm value.
High market-wide overvaluation leads to high error in estimating synergies.
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Theoretical background. There is misvaluation. Behavioral explanation why targets accept an overvalued stock as acquisition currency. Shleifer and Vishny (2003): name 4 reasons:
-Market timing model of acquisitions based on irrational investors.
-Acquirers are overvalued and preserve value for long-term shareholders by acquiring less overvalued targets with overpriced stock.
-Target managers have short horizons or get paid for agreeing to the deal.
-Target managers wish to sell out while their stocks are still overvalued.
Name 3 empirical predictions from Rhodes-Kropf, Robinson and Viswanathan
2 Relative level of misvaluation and payment methods: Cash targets are more undervalued than stock targets. Cash acquirers are less overvalued than stock acquirers.
3 Creating merger waves (merger intensity predictions): Increasing misvaluation increases the probability that a firm is in a merger, is the acquirer, and uses stock as the method of payment. Increasing sector misvaluation increases merger activity, and the use of stock as method of payment, in that sector.
Name 4 results from the relative value prediction. from Rhodes-Kropf, Robinson and Viswanathan.
Q theory versus RKV and SV theories:
1. High M/B targets are bought by even higher M/B acquirers.
2. Not high M/B buys low M/B.
3. M/B of targets is higher than M/B of firms not involved in mergers.
4. Driven by targets participating in stock transactions.
Rhodes-Kropf, Robinson and Viswanathan(2015)
Results - relative value predictions Empirical prediction 1 - Overvalued firms use stock to buy relatively undervalued firms when both firms are overvalued:
name 3 results with respect to empirical prediction 1:
- Targets have lower firm-specific error than acquirers.
- Driven by stock-financed acquisitions.
Rhodes-Kropf, Robinson and Viswanathan(2015):
Long-term effects of misvaluation driven mergers.
-Low growth firms acquire high growth firms:
- Targets have an average long-run value to book of 0.54.
- Buying growth prospects when a firm (sector) is overvalued.
Rhodes-Kropf, Robinson and Viswanathan(2015).
Empirical prediction 4.
- (b) Misvaluation influences the probability that a firm acts as an acquirer.
yes or no
Empirical prediction 4c is?
Empirical prediction 4 - (c) Misvaluation influences the probability that a firm uses stock as a method of payment.
Empirical prediction 5 - (a) High sector misvaluation increases merger activity.
what can we say with respect to the dependent variable.
and what about the realtion between merger activity and M/B ratio
- The positive relation between merger activity and M/B ratio does not hold after controlling for year dummies.
Empirical prediction 5 - (b) Increasing sector misvaluation increases the use of stock as a method of payment in that sector. Rhodes-Kropf, Robinson and Viswanatan
- Sector-average long-term value to book seems to be negatively related to the number of stock-financed mergers in sector j in year t.
Why the Q theory cannot explain these results?
2 Q dispersion cannot explain merger activity during high misvaluation periods.
3 During merger waves 50% of transactions and 65% of dollar volume are done by the acquirers in top misvaluation quintile.
Baker, Pan and Wurgler (2012).
the last 2 paper were about understanding M & A activity.
the following paper is about: Formulating offer prices in M&A deals:
What are the 4 research questions of this paper:
2 Does the anchoring bias influence the probability of deal success?
3 Does it influence bidder’s announcement returns?
4 What is the relation between anchoring in offer prices and merger waves?
Baker, Pan and Wurgler (2012).
what is the anchoring motivation?
Historical prices should not be relevant, i.e. prices today should incorporate all publicly available past information.
Reference point for selling should be an aspiration level.
The 52-weeks highest price is a reasonable aspiration level to serve as a common anchor for multiple investors that are not fully rational.
Anchoring in M&A offer prices Why recent price peaks will serve as an anchor in M&A transactions:
Bounded rational investors can consult recent peak prices when considering an offer due to constrained resources (time, information, knowledge).
Use recent price peaks to improve negotiating position.
For the management recent price peaks can serve as a litigation protection.
2 Bidder’s perspective:
Constrained bidders will use it as a valuation input.
Use recent price peaks to justify offer price to own shareholders.
Consider the probability of offer acceptance.
Baker, pan and wurgler ( 2012). name 3 results:
- Capital reallocation.
- Other factors like payment method and attitude also influence the probability of reaching a successful deal.
Baker, Pan, Wurgler(2012):
Bidders announcement returns
Does the market view the relation between 52-week high and offer premia as relative overpayment or higher synergies?
Bidders shareholders react even stronger if the offer price depends on the price peak anchors: if the component of offer premium driven by 52-week high increases by 10%, the bidders announcement return is 2.45% lower.
Overpayment amount: between $24.0 and $140.9 million per deal.
Giglio and Shue ( 2014). name 3 main findings of this paper
2 Hazard rates of withdrawal are constant over time.
3 Returns are predictable: the average return across deals move together with the hump-shaped completion hazard rates.
Name 3 findings from the Giglio and SHue( 2014) paper on returns and hazard rates
- Returns are not constant over the merger event period.
- Hazard rates significantly predict returns over time.
- Return predictability is surprising for rational markets.
Giglio and Shue. name 2 Alternative rational explanations
Variation in systemic risk (FF factors) during event period.
Variation in downsize risk during event period.
Variation in idiosyncratic risk during event period.
These risk exposures do not vary significantly over time.
2 Variation in frictions and asymmetric information:
Selling pressure form institutional investors.
Reduced market liquidity due to higher asymmetric information.
Last day effects.
These frictions do not explain the abnormal returns.
Giglio and Shue ( 2014)
Rejection of alternative risk explanations . name 3
Variation in idiosyncratic risk during event period.
Betas for High and Low strategies and not different from each other
From Gilgio and Shue. name 3 reasons for limits to arbitrage
2 The abnormal returns are higher in the earlier sample period.
3 The abnormal returns are higher among less liquid stocks.
4 Transaction costs reduce substantially the alphas.
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