Winner’s Curse in Takeovers? Evidence from Investment Bank Valuation Disagreement

59 Pages Posted: 2 Nov 2021 Last revised: 12 Oct 2023

See all articles by Tingting Liu

Tingting Liu

Iowa State University ; European Corporate Governance Institute (ECGI)

Tao Shu

The Chinese University of Hong Kong (CUHK) - CUHK Business School

Jasmine Wang

University of Virginia

Date Written: October 11, 2023

Abstract

Using a unique setting where target firms hire multiple investment banks as advisors, we construct a novel measure of target valuation uncertainty based on the disagreement of investment banks’ target valuation. We find that, in the presence of high valuation disagreement, bidders on average pay significantly higher acquisition premiums. These over-paying bidders experience poor merger performance and create low merger synergies. Our findings are more pronounced among overconfident CEOs, and are more likely attributable to disagreement over the common value of the target firm. Our study suggests that the winner’s curse exists in takeovers and causes distortions in resource allocation.

Keywords: Mergers and acquisitions, winner’s curse, valuation disagreement, acquisition premiums, bidder returns, merger synergies, CEO overconfidence

JEL Classification: G41; G14; G34

Suggested Citation

Liu, Tingting and Shu, Tao and Wang, Jasmine, Winner’s Curse in Takeovers? Evidence from Investment Bank Valuation Disagreement (October 11, 2023). Available at SSRN: https://ssrn.com/abstract=3954130 or http://dx.doi.org/10.2139/ssrn.3954130

Tingting Liu (Contact Author)

Iowa State University ( email )

2330 Gerdin Business Building
Ames, IA 50011
United States

European Corporate Governance Institute (ECGI) ( email )

c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels
Belgium

Tao Shu

The Chinese University of Hong Kong (CUHK) - CUHK Business School ( email )

Cheng Yu Tung Building
12 Chak Cheung Street
Shatin, N.T.
Hong Kong

Jasmine Wang

University of Virginia ( email )

125 Ruppel Dr
306 Rouss and Robertson Hall
Charlottesville, VA 22903
United States

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