Darryl Laws

 Mergers and Acquisitions. There are mainly two sublevels in micro level analysis, of which one is concerned with the behavioral analysis about M&A transaction motives and M&A performances, and the other is concerned with the driving factors upon both sides of the M&A enterprises in the capital market, and the effect analysis of the M&A mechanism on the reallocation of resources. However, both the macro- and micro level analysis eventually traces back to the analysis of the microstructure, as the M&A objective is on the enterprise, and the buyer’s research fundamentally aims to analyze the problem of individual enterprise’s utility maximization, output maximization, cost minimization or profit maximization  (Andrade, Mitchell, and Stafford, 2001). Thus, the M&A decision is a micro-economic decision. In sum, theories for M&A include the management synergy theory, the different efficiency theory, the scale economy theory, the scale effect hypothesis, the portfolio theory, the diversification strategy theory, the financial synergy theory, the tax avoidance hypothesis, the speculation theory, the undervalued hypothesis, the market competition theory, the market power hypothesis, the transaction cost theory, the organization-substituting-the-market hypothesis. The process of M&A can be cut into three slices. The first slice is the self-evaluation of the target enterprise, the second slice is the assessment of the value of the target enterprise by the acquirer, and the third slice is the game process played between the acquirer and the target enterprise. The both sides come close in the evaluation method of the value assessment while the difference lies in the information each side has about the target’s enterprise value and each side adopts in making decisions (Leland, 2007).

Analysis of Literature on Human behavior decision-making impacts in Mergers and Acquisitions. 

Literature on mergers and acquisitions identifies three main motivations for takeovers; first the creation of synergies so that the value of a new combined entity is greater than the sum of its previously separate values (Bradley,1988; Dyer, 2004 and Tease, 1986), the second motivation exists because of agency issues (Eisenhardt, 1989) between managers and shareholders. Jensen (1986) suggests that managers may rationally pursue their own objectives at the expense of shareholder’s interests, and the third motivation for takeovers is managerial hubris (Roll, 1986) and behavioral bias. Roll’s hubris hypothesis suggests that managers of acquiring firms make valuation errors because they are too optimistic about the potential of combined synergies in a buyout or takeover. As a result, manager often overbid for target firms to the detriment of their stockholders.

Thus, there are two main theories; 1) rational responses to agency costs and irrational response to managerial hubris that have been detrimental to explain why managers make value destroying acquisitions. Although the hubris hypothesis has considerable intuitive appeal it has only been lesser subjected to empirical testing. Behavioral assumptions such as overconfidence have become common in the asset pricing literature but corporate finance literature has largely neglected behavioral assumptions in models of managerial decision-making (Barberis, 2003; Allen and Morris, 1998).

Darryl Laws