Winner’s Curse in Takeovers? Evidence from Investment Bank Valuation Disagreement
59 Pages Posted: 2 Nov 2021 Last revised: 12 Oct 2023
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: Suggested Citation