The Psychology of Pricing in Mergers and Acquisitions

Abstract

Psychology-driven pricing practices are evident in mergers and acquisitions. In particular, offer prices are highly influenced by the target’s 52-week high stock price. This price likely serves as a psychological anchor—a starting point from which actual bid prices do not sufficiently adjust to reflect only current information (Tversky and Kahneman (1974)). Bidders who pursue targets with 52-week highs that are well above their current prices experience more negative offer announcement effects; their investors appear to perceive such bids as more likely to be overpaying. The probability of deal success is discontinuously increased by offering the target a price above its 52-week high, indicating that psychology-driven prices have real effects.