Reference Point Prices in Mergers and Acquisitions and the Influence of Information Asymmetry: Evidence From the UK

Abstract: This thesis examines the role of past peaks in target share prices as reference points in mergers and acquisitions in the UK, with a focus on target 52-week high share prices. The results indicate that there is a positive, non-linear relationship between past peak share prices and offer prices. The relationship is robust to the inclusion of a range of control variables and across subsamples. The effect of 52-week high prices on offer prices is stronger in deals with all-cash consideration and in deals with multiple bidders competing for the same target. However, 52-week high prices do not affect the probability of deal success or the bidders' announcement period return. The thesis also introduces proxies to examine whether the relationship between 52-week high prices and offer prices is affected by information asymmetry between target insiders and bidders. Consistent with the hypothesis that higher information asymmetry leads to a stronger reliance on reference point prices, the relationship between 52-week high prices and offer prices is stronger in cross-border deals. However, no consistent effect is found when analyst coverage, public firm age, target volatility, bidder toehold or target average bid-ask spread are used as proxies for information asymmetry.