1. Anchoring & Acquisitions
Qingzhong Ma, CSU, Chico, CA
David A. Whidbee, WSU, Pullman, WA
Wei Athena Zhang, CSU, Chico, CA
AFA, Chicago, January 6, 2017
Anchoring and Acquisitions
Ma, Whidbee, Zhang

2. Our Research Question
When evaluating firms making acquisitions, are investors influenced by the anchoring bias?
At the announcement
Tendency to anchor on recent peak prices
Anchoring and Acquisitions
Ma, Whidbee, Zhang

3. The M&A Literature M&A: significant corporate event
Fundamental factors in market response
Free cash flows (Jensen, 1986; Harford, 1999)
Size (Moeller et al., 2004)
Target uncertainty (Officer et al., 2009)
Management entrenchment (Harford et al., 2012)
Valuation levels (Shleifer & Vishny, 2003; Dong et al., 2006; RKRV, 2005; Akbulut, 2013; Fu, Lin, Officer, 2013; Duchin and Schmidt, 2013)
Management overconfidence (Malmendier & Tate, 2008)
And many others
Anchoring and Acquisitions
Ma, Whidbee, Zhang

4. Work on Non-Fundamental Factors
Investor sentiment (Facebook status update) influencing perceived synergies (Danbolt, Siganos, & Vagenas-Nanos, 2015)
The role of target peak prices on offer prices (Baker, Pan, & Wurgler, 2012)
Anchoring and Acquisitions
Ma, Whidbee, Zhang

5. We Focus on Acquirers
Question: Do past peak prices factor in the evaluation of acquirers at announcement?
Anchoring bias
“… most reliable and robust” (Kahneman, 2011)
Widely applied in the finance literature
Anchoring phenomenon
When estimating the value of an uncertain amount, subjects are influenced by salient reference points. (Tversky & Kahneman, 1974)
E.g., list prices in housing markets and new car markets
Anchoring and Acquisitions
Ma, Whidbee, Zhang

6. Our Predictions Low price/52-week peak  higher acquirer returns
Being far from the 52-week high => estimates of merged firm stock prices may lean toward the plausible value reflected in the 52-week high
Being near the 52-week high => estimates of merged firm stock prices may be limited as there is no recently observed higher plausible value
More pronounced for greater uncertainty, poorer info environment, less investor sophistication
Long term reversal
Anchoring and Acquisitions
Ma, Whidbee, Zhang

7. Main Findings
Lower Pt–6/H  higher acq. returns (Reference Price Effect)
Univariate, regressions with a host of controls, estimated on a variety of subsamples
Lasts for at least 20 days
The effect is not explained by valuation levels
Exists even for cash-only deals
The effect is stronger in deals involving
greater uncertainty (volatility, #analysts, relative size, non-cash payment)
more opaque information environments (target listing status)
less sophisticated investors (individual investor ownership)
The effect reverses over the longer horizon (1 year), consistent with a behavioral bias
Anchoring and Acquisitions
Ma, Whidbee, Zhang

8. Sample /Data 19,119 M&A deals from SDC, 1981-2014
U.S. acquirers covered in CRSP & Compustat
Targets public & private
Trivial deals excluded (deal value < $1mil; relative size < 5%)
Percent own < 50% before deal
Other common filters (e.g., relative size < 200%)
Anchoring and Acquisitions
Ma, Whidbee, Zhang

9. Key Variables (CAR & RPR)
CAR: Cumulative Abnormal Returns [–5, +1]
Market model, estimated [–370, –253]
Harford (1999)
RPR: Pt – 6 / H
Pt – 6 Closing price at day t – 6
H The 52-week high relative to t – 6
Anchoring and Acquisitions
Ma, Whidbee, Zhang

10. The Reference Price Effect (Two-group results in Table 2, Panel B)
All
CAR(%)
Low RPR
(L)
High RPR
(H)
Mean
Median
1.501***
(0.566)***
2.108***
(0.981)***
0.894***
(0.288)***
Anchoring and Acquisitions
Ma, Whidbee, Zhang

11. The Reference Price Effect (Fig. 1)
Anchoring and Acquisitions
Ma, Whidbee, Zhang

12. The Reference Price Effect (In regressions)
CAR = f(RPR, controls)
Control variables (size; relative size; listing status; cash; stock; M/B; leverage; dormant; relatedness; tender offer; hostile; toehold; cross border; past return)
Industry and year fixed effects
Standard errors clustered at firm level
RPR coefficient = % (t=-8.56)
One SD change in RPR  11.0% SD change in CAR
One SD change in Size  7.5% SD change in CAR
Economically significant
Anchoring and Acquisitions
Ma, Whidbee, Zhang

13. Anchoring Versus Valuation
Proxies for valuation levels
Market-to-book
Rhodes-Kropf, Robinson, Viswanathan (2005)
Others (not shown)
Our analysis
Regressions on subsamples
Our main findings remain strong
RPR coefficients are negative and significant
RPR coefficient significant for cash-only deals
Anchoring and Acquisitions
Ma, Whidbee, Zhang

14. Role of Valuation Levels (Table 5)
Anchoring and Acquisitions
Ma, Whidbee, Zhang

15. Additional Evidence of Anchoring
Proxies for uncertainty, information opaqueness, and investor sophistication (s)
High volatility of acquirer stock
Acquirers followed by fewer analysts
Higher relative size
Use of non-cash payment
Unlisted (private or subsidiaries) targets
Higher individual investor ownership
CAR = f(RPR, RPR*s, controls, s)
All coefficients on RPR*s are negative and significant
Anchoring and Acquisitions
Ma, Whidbee, Zhang

16. Role of Uncertainty (Table 6)
Anchoring and Acquisitions
Ma, Whidbee, Zhang

17. Role of Listing Status (Table 7)
Anchoring and Acquisitions
Ma, Whidbee, Zhang

18. Role of Investor Sophistication (Table 8)
Anchoring and Acquisitions
Ma, Whidbee, Zhang

19. Unobserved Fundamental Factor(s)?
Other possible alternative explanations?
Hubris, entrenchment, anticipated acquisitions, …
If reference price effect acts as a proxy for a fundamental factor, market reaction should be long-lived  long-horizon returns should not differ between high and low RPR groups.
Our finding: There is reversal in the longer term
Anchoring and Acquisitions
Ma, Whidbee, Zhang

20. Long-term Reversal (BHAR 1-year, Table 9, Panel A)
Low RPR
– 5.93***
High RPR
– 1.33***
H – L
4.60***
Low M/B
– 2.80
High M/B
– 4.45***
H – L
– 1.66**
Low RKRV
– 3.27
High RKRV
– 3.92***
H – L
– 0.65
Anchoring and Acquisitions
Ma, Whidbee, Zhang

21. Long-term Reversal and deal success (BHAR 1-year, Table 9, Panel C)
Anchoring and Acquisitions
Ma, Whidbee, Zhang

22. Robustness Alternative hypotheses Alternative CARs Alternative RPRs
Volatility subsamples
Size subsamples
Alternative CARs
Window; eq’m return
CAR controlling for RPR
Alternative RPRs
Investor learning? (1980s, 1990s, 2000s)
52-week low
RPR of S&P 500 Index
Alternative measures of valuation levels (Mt–6/B, Pt–6/V)
Alternative measures of past returns (one month)
Falsification tests (price relative to the 99th, 95th, 90th, 75th percentiles of past prices)
Anchoring and Acquisitions
Ma, Whidbee, Zhang

23. Summary & Conclusion Summary Conclusion
A strong reference price effect in acquirer CAR.
Stronger effects among deals of greater uncertainty, poorer information, less sophisticated investors.
The effect lasts for 20 days and is reversed in one year.
Conclusion
Anchoring bias helps shape investor demand for stocks.
The market reaction to acquisition announcements is affected by anchoring bias and the effect is economically meaningful.
Anchoring and Acquisitions
Ma, Whidbee, Zhang