behavioral finance

The target company’s 52-week high exhibits a strong anchoring effect on merger and acquisition decisions, according to three economists in the working paper, “The Psychology of Pricing in Mergers and Acquisitions.” A Wall Street Journal article on the paper is gated. The full paper can be downloaded here. A summary is below:

The 52-week high stock price is widely available and represents a salient price level to investors and managers. Empirically, we show that the target’s 52-week high exercises a strong effect on the bidder’s offer price. A number of bidders offer exactly this price, demonstrating its unique salience. The effect is difficult to square with alternative explanations and appears best explained in terms of the use of the 52-week high as a reference point by the target’s shareholders or as an anchor in negotiations with the bidder.

Our evidence suggests that bidders’ shareholders view bids driven by the target’s 52-week high as overpaying: They react especially negatively to the component of the offer price driven by the target’s 52-week high. Most important, perhaps, is the fact that psychological pricing has real effects. Bids that exceed the 52-week high discontinuously increase the probability of deal success and thus the distribution of capital across firms’ alternative investment policies.