Merger Pricing

Baker, Pan, and Wurgler recently posted a paper, The Psychology of Pricing in Mergers, analyzing the pricing of mergers.  They conclude that the 52-week high provides an important psychological anchor in the pricing of mergers.  This paper got a nice write up in today's WSJ.  Here's the abstract.

Psychology-driven pricing practices are evident in mergers and acquisitions and appear to be economically important. In particular, offer prices are highly influenced by the target's 52-week high stock price. This price probably 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)). A substantial fraction of bidders offer the target precisely its 52-week high, whether it was achieved recently or nearly a year ago. Bidders who pursue targets with 52-week highs that are well above their current prices experience more negative offer announcement effects; their investors perceive such bids as more likely to be overpaying. The probability of deal success is substantially and discontinuously increased by offering the target a price above its 52-week high, indicating that psychology-driven prices have real effects.

- bjmq