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The Art of Capital Restructuring: Creating Shareholder Value through Mergers and Acquisitions by H. Kent Baker, Halil Kiymaz

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CHAPTER 21

Behavioral Effects in M&As

JENS HAGENDORFF

Senior Lecturer, The University of Edinburgh

INTRODUCTION

Most studies included in this book analyze the motivation and implications of mergers and acquisitions (M&As) within a traditional finance paradigm. The critical assumption underlying this paradigm is that the behavior of economic agents is fully rational. This suggests that economic agents can impartially process complex information and that their choices are aimed at utility maximization. One consequence of this rationality assumption is that merger activity is motivated by economic reasons and should, therefore, lead to measurable postmerger performance improvements.

Some economic reasons for M&As include the acquirers’ desire to realize synergetic gains, or alternatively, to increase profits via unique asset combinations or increases in market power. However, the effects of M&A performance are difficult to reconcile within this framework. Empirical evidence highlights that many mergers destroy shareholder value and fail to result in long-term performance gains in the post-M&A period (e.g., Fuller, Netter, and Stegemoller, 2002; Moeller, Schlingemann, and Stulz, 2005). This divide between the economic motivations of M&As and their realized performance effects has given rise to the so-called “merger performance puzzle.” In essence, if mergers perform so poorly, why are they so popular? The neoclassical paradigm outlined above, with its strong emphasis on rational expectations ...

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