Does the Disposition Effect Matter in Corporate Takeovers? Evidence from Institutional Investors of Target Companies
48 Pages Posted: 24 Oct 2012
Date Written: June 28, 2012
Abstract
This paper examines whether one of the most important participants in the takeover market, the institutional investors of target companies, suffers from the disposition effect; and if so, how this selling bias influences the takeover outcomes. I report robust evidence that target institutional investors are reluctant to realize losses. This bias further allows their sunk cost to affect both the takeover price and the deal success. My results are explained by neither the undervalued targets, nor the 52-week high price effect. They are most pronounced among targets whose investors have a strong propensity to hold on to loser stocks.
Keywords: Prospect Theory, Loss Aversion, Disposition Effect, Institutional Investor, Takeover
JEL Classification: G20, G34
Suggested Citation: Suggested Citation
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