Date of Award

Summer 2011

Document Type


Degree Name

Doctor of Philosophy (PhD)


Business Administration-Finance

Committee Director

Mohammed Najand

Committee Member

Kenneth Yung

Committee Member

Vinod Agarwal


This paper investigates the impact of previous losses incurred by U.S serial bidders on their M&A strategic choices and premiums paid to acquire targets. The Hubris and Overconfidence theories suggest that managers tend to overpay as a result of exaggerating their ability to extract value and manage post-acquisition integration process between the acquiring firm and its target. Managerial overconfidence, which is signaled by conducting several acquisitions within a short time period or by other manager-specific investment attributes, has been shown to contribute to increasing premiums in M&A transactions and subsequent poor post-acquisition performance.

Experimental findings in the area of psychology over the past three decades introduced the notion that economic agents experience utility resulting from changes in wealth (gains and losses) relative to a reference point rather than the level of total wealth and that losses loom larger than gains. The Prospect theory (Kahneman & Tversky, 1979) suggests that decision makers tend to be more aggressive (risk taking) after a loss in order to recover their losses and more risk averse after gains. The Quasi-Hedonic hypothesis (Thaler & Johnson, 1990) indicates that decision makers will become more risk taking after repeated gains ("House Money Effect") but tend to be more risk averse after losses to avoid further pain. However, decision makers tend to be more risk taking after losses if there is a chance for breaking even.

Using a sample of 16,582 M&A transactions by 3,512 U.S public bidders involved in at least two acquisition attempts over the 1990-2005 period, this study introduces several loss proxies based on corporate, market, industry and managerial compensation factors. Several empirical tests are conducted in this study to control for concurrent decisions taken by managers, endogeneity effects in explaining premiums, alternate model specifications, industry factors, time period effects as well as robustness for managerial overconfidence and entrenchment. The results are consistent across all sub-periods, however, the significance of M&A success history variables diminish over the 2001-2005 period.

I present evidence that bidders suffering from earlier losses in terms of market, industry and compensation factors tend to be more aggressive in their target choices (i.e. choosing private and/or unrelated targets) and tend to overpay. Corporate loss events/shocks, such as failure to conclude an earlier merger deal, tend to motivate managers to make safer bets in terms of choosing public targets operating in related industries, however, still tend to overpay for targets. As the level of stock ownership of the bidder's management/executive team increases, managers tend to respond to corporate failure events/shocks in a similar fashion as other loss proxies. The results presented are generally robust to overconfidence, insider ownership, sub-periods and industry wide factors. The results are also robust to the compensation structure of the management team and target-bidder relative size.

In addition, the results presented in this study support the agency theory implications in regards to the bidder's target choices (i.e., related/unrelated and private/public targets) and the market-driven/mispricing theory in regards to partially explaining premiums paid by bidders to acquire their prospective targets.

The results presented provide support to the prospect theory propositions that losses experienced by economic agents induce an aggressive or risk taking behavior in subsequent bets by pursuing non-public and/or unrelated targets and offering higher premiums.


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