The Impact of Behavioral Finance on M&A Performance during the Most Recent Merger Wave in Europe

Jonas Emil Meier-Larsen Nonboe Kobborg & Martin Ploufmann Okkerstrøm

Student thesis: Master thesis


The aim of the thesis is to gain further insights into the phenomenon of merger waves as well as the effect that behavioral finance can impose on the outcome of M&A performance. The volume of M&A transactions greatly varies over time, but in spite of the fact that an increasing amount of empirical research finds that a remarkable share of M&A transactions are failing in delivering the much anticipated returns, the deliberate choice of pursuing an M&A strategy keeps retaining its strong popularity from the perspective of corporate managers. This empirically observed paradox creates the motivation to not only study the motives associated with traditional economic theory, but to look past these classical motives which are based on a different set of assumptions and investigate the dubious motives related to behavioral finance as an attempt to complete the picture. Within the sphere of the neoclassical paradigm, the thesis presents the theoretical and traditional motivations for engaging in M&A activity in regards to the creation of synergies, vertical and horizontal integration, economies of scale and scope as well as the acquisition of valuable resources. These motives based on their strong and underlying assumptions in terms of complete rationality of economic agents as well as efficient markets, are then followed by the dubious motives related to behavioral finance in terms of the heuristics of herd behavior and anchoring as well as the biases of overconfidence, the confirmation trap and escalation of commitment, which ultimately individually or in combination holds the potential of leading to value destruction in an M&A context. Samples consisting of data collected in the European M&A market from the period of 1998-2014 are during different empirical studies investigated, where it is found that the phenomenon of merger waves can be empirically proven. Furthermore, in an operation performance analysis in regards to M&A performance, it is revealed that the ratio of underperforming M&A transactions equals between 46% and 49% on average when compared to appropriate benchmarks. Finally, it is found that equity financing becomes relatively more attractive as the preferred method of payment in terms of M&A financing during times with relative high market capitalizations, and vice versa. The empirical studies of the issues related to behavioral finance suggest that the biases of overconfidence and the confirmation trap do have a measurable impact on the performance of corporate managers in an M&A context, since the test revealed that when the previous acquisition has been successful, a proportion between 49-69% of the following acquisitions turns out unsuccessfully. This outcome clearly stands out as the ratio of relative underperformance is higher than what was found during the M&A performance analysis. The heuristics of herd behavior and anchoring also play a significant part, as the associated study found that during times where a large number of M&A deals take place, the abnormal return of these specific deals being carried out tend to be relatively lower and even negative in some cases, compared to the abnormal return measures during times of reduced M&A activity. It is impossible to entirely eliminate the potential risks associated with the issues of behavioral finance, since these biases and heuristics are deeply rooted in the nature of human beings and as a result continuously has the potential of effecting the decision making process of corporate managers in an M&A context. Nevertheless, the thesis attempts to provide a specific set of recommendations targeted companies on the verge of pursing an M&A strategy as an approach to reduce and mitigate the risks associated with the issues of behavioral finance.

EducationsMSc in Finance and Strategic Management, (Graduate Programme) Final Thesis
Publication date2016
Number of pages139