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

Ye, Pengfei, Does the Disposition Effect Matter in Corporate Takeovers? Evidence from Institutional Investors of Target Companies (June 28, 2012). Journal of Financial and Quantitative Analysis (JFQA), Forthcoming, Available at SSRN: https://ssrn.com/abstract=2166022

Pengfei Ye (Contact Author)

Virginia Tech ( email )

1016 Pamplin Hall
Blacksburg, VA 24061
United States

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