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

Inside the Black Box of Private Merger Negotiations

Several authors (Boone and Mulherin, 2007[1]; Aktas, de Bodt, and Roll, 2010[2]) have noted a paradox in the mergers and acquisition (M&A) market since 1990. While there have been few competing public bidders, hostile offers, or public-offer price revisions, the average premiums paid to acquire target firms have been substantial. On the surface, the combination of friendly deals and high premiums seems puzzling, given that target management is more likely to negotiate private benefits at a cost to shareholders in friendly deals, while hostile offers are more likely to induce multiple-bidder auctions, which should theoretically yield … Read more

How Property Rights Contributed to the Evolution of Takeover Auctions

Ronald Coase (1959, 1960)[1] [2] insightfully noted that with well-defined property rights, resources flow to their highest-valued use. In a recent paper, we apply this view of property rights to the corporate takeover market in the United States. Observers such as Jensen (1993)[3] argue that the major corporate-control activity beginning in the 1980s in the United States emanated from political, economic, and technological shocks that upset the existing structure of American industry. Indeed, innovations in junk bond financing and the relaxation of antitrust laws made large firms targets of corporate takeovers for the first time. In our analysis, … Read more