Psychology of Value Destruction in M&As

Karolina Monika Piotrowska & Karina Dembinski

Student thesis: Master thesis

Abstract

Scholars from multiplie fields have shown an increasing interest in the causes of value destruction in M&As, as recent empirical studies have found that many mergers and acquisitions fail to create value. In the current literature, the principle agency theory has been put in the center of attention to analyze the phenomenon of the relationship between management and shareholders. This fact has motivated us to develop a framework to organize the previous M&A literature in the context of the principalagency theory assumptions, i.e. managerial self-interest, risk aversion, information asymmetries and goal conflict, to create the link between the agency relationship between CEO and shareholders and its impact on the level of value-destruction in M&As. The theoretical imperfections have been complemented by the behavioral finance theory, due to an increasing importance of psychology in the finance literature. The theoretical simplicity, together with the significant impact of external factors on human behavior, have created the motivation to develop the normative model, which adds value to the existing literature by generating a deeper and more profound understanding of the application of psychology in the agency relationship, to explain reasons behind value-destroying M&As. The situational analysis has revealed multiple conditions which moderate the level of valuedestruction in M&As by capturing both externalities and human behavior patterns. The results of our work suggest the significant impact of the presence of social ties, market complexity & uncertainty and merger waves on the level of value destruction. The outcomes are discussed in relation to the unique approach, which has been undertaken to fulfil the existing gap both in psychology and finance literature.

EducationsMSc in Finance and Strategic Management, (Graduate Programme) Final Thesis
LanguageEnglish
Publication date2018
Number of pages135