How Investment Banks’ Disagreement over Valuation Contributes to the Winner’s Curse

The well-developed theory of the winner’s curse can potentially explain the poor performance of mergers and acquisitions (Roll, 1986). A key reason for the curse is the uncertainty concerning a deal’s value (e.g., Capen, Clapp, and Campbell, 1971; Bazerman and Samuelson, 1983; Varaiya, 1988).  The greater the disagreement over the target’s value, the more likely that a winning bid will fail to account for the uncertainty and lead to overpayment. The empirical relevance of the winner’s curse is central to takeover efficiency, because it teaches that the bidder who overpays the most, instead of the bidder who can create the … Read more