The impact of prior stock market reactions on risk taking in acquisitions

Shyam Kumar · Jaya Dixit · Bill B. Francis

35 citations0/0 files storedStrategic Management Journal

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Corporate Finance and Governance Financial Markets and Investment Strategies Decision-Making and Behavioral Economics

Abstract

We study the relationship between the stock market's reaction to a prior acquisition and the risk associated with a subsequent acquisition. Using a sample of 823 acquisitions over the period 1990–2006 we find that acquirers buy increasingly volatile targets both as the abnormal dollar gains from the previous acquisition announcement increase, and as the abnormal dollar losses increase (i.e. a V shaped relationship). Our findings are consistent with psychological theories of decision making and risk seeking, including prospect theory and the house money effect. In addition, they highlight that the stock market reaction to the prior acquisition announcement acts as an important reference point in acquisition decisions . Copyright © 2014 John Wiley & Sons, Ltd.

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References

1979Prospect Theory: An Analysis of Decision under Risk 1988Prospect theory: An analysis of decision under risk 1992Advances in prospect theory: Cumulative representation of uncertainty 2002Illiquidity and stock returns: cross-section and time-series effects 1963A Behavioral Theory of the Firm 1964Richard M. Cyert & James G. March, A Behavioral Theory of The Firm, Prentice-Hall, Inc., Englewood Cliffs, New Jersey, 1963, 332 s.1986The Hubris Hypothesis of Corporate Takeovers 2020Integración de los mercados financieros Latinoamericanos por medio de MILA

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