The 52-Week High Reference Price Effect on Indian Mergers and Acquisitions: Does the Regulatory Environment Matter?
Posted: 17 Feb 2015
Date Written: February 15, 2015
Abstract
The paper establishes the salience of the target’s 52-week high price as a reference price, while determining the offer premium in Indian merger & acquisition (tender offer) deals, after controlling for the regulatory requirements in India. The SEBI Regulation, Substantial Acquisition of Shares and Takeovers (SAST), 2002 and 2011, mandates a minimum offer price taking into account various relevant parameters that includes the target’s historical market prices, i.e. the 26-week and 60-day high prices. The results show that the reference effect is positive and significant after controlling for regulation induced anchoring to the 26-week and 60-day high prices, which subsequently is a subset of the 52-week reference price under study. Specifically, the reference effect is positive and significant for deals when the offer price exceeds the 52-week high price. Incremental changes in the regulation in 2011 do not reduce the effect of the 52-week high price as a psychological anchor. Among firm characteristics, the offer premium significantly reduces for firms with higher Price to Earnings valuation. Further, the offer premium is significantly higher when the objective of acquisition is change of control.
Keywords: Offer price, Reference price, Regulation, Tender offer
JEL Classification: G31, G34
Suggested Citation: Suggested Citation