Behavioral analysis of mergers and acquisitions decisions

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Mergers and acquisitions (M&A) are among the key strategic decisions that firms make. But the problem is that they often result in failure and impairment loss, with the fair value of the acquisition price becoming an issue that poses the risk of overvaluation. The purpose of this paper is to explain the nature of this risk by shedding light on the errors and biases of decision-making managers and directors and their effect on decision-making processes which involve a high degree of discretion and judgment. The paper finds that biases causing overvaluation include overconfidence by managers; an escalation of bidding prices leading to winner’s curse; anchoring in pricing; the endowment effect; and hindsight and confirmation biases. Corporate governance architecture can be designed to mitigate these biases while preserving the positive aspects of overconfidence, such as its promoting of productive and creative activities and coherent internal management. But it is not a panacea since independent directors also have biases and conflicts of interest inherent in the mechanism. Advancements in the understanding of human emotion and psychology promise to protect shareholders by deepening our understanding of corporate decisions.

Keywords: Mergers and Acquisitions, Corporate Governance, Decision Making, Cognitive Science, Behavioral Finance

Authors’ individual contributions: The author is responsible for all the contributions to the paper according to CRediT (Contributor Roles Taxonomy) standards.

JEL Classification: G34, G41, O16, D91

Received: 04.06.2019
Accepted: 13.08.2019
Published online: 09.10.2019

How to cite this paper: Asaoka, D. (2019). Behavioral analysis of mergers and acquisitions decisions. Corporate Board: Role, Duties and Composition, 15(3), 8-16.