Relative reference prices and M&A misvaluations

Purpose The purpose of this paper is to examine the misvaluation hypothesis using a relative reference point (RRP) in mergers and acquisitions (M&A) market. Design/methodology/approach The paper studies 1,878 M&A deals in the US market announced between January 1985 and December 2014. Findings The paper finds that bidders prefer stock payments when the RRP increases. The RRP is positively related to the offer premium and the target announcement returns. Although the RRP is negatively related to the bidder announcement returns, it is positively related to the long-run performance of bidders who time the market with overvalued stocks. The results are consistent with the predictions of the misvaluation hypothesis and reference point (RP) theory. Originality/value The authors construct a dynamic valuation framework to explain the misvaluation hypothesis by linking M&As’ misvaluation with RP theory. This paper provides direct evidence that the reference-dependence bias is prevalent for more experienced investors in major corporate investment decisions and offers fresh insights into the method of payment hypothesis.

Reference points and method of payment in mergers

Purpose The purpose of this paper is to examine the impact of the target and bidder reference points on the method of payment in mergers. When considering initial and final results for target and bidder, the target appears to have more negotiating power than the bidder in achieving the financial mix preference that was initially articulated. Design/methodology/approach The authors examine the impact of target and bidder reference points on the consideration sought by the target and the consideration offered by the bidder. The authors test whether the target reference points has an impact on the final method of payment agreed upon by the target and the bidder. Findings The authors find that targets with a longer distance to their respective target reference points prefer to receive cash financing in the consideration sought, while bidders with a longer distance to their respective reference points prefer stock financing in consideration offered. The authors also find evidence that target’s longer distance to its reference point is associated with the use of cash over stock, while the bidder reference point has no impact on the final method of payment used in the merger. Practical implications These insights may be used by the management to formulate the optimal mix of financing in M&A transactions. Originality/value This is an original paper exploring the effect of behavioral finance on corporate decision making.

Value of Financial Flexibility and Firm’s Financial Policies: Empirical Evidence from the Firms Listed in Tehran Stock Exchange

The main objective of this paper is to investigate the relationship between financial flexibility and financial policies of the firms listed on Tehran stock exchange. The population of this descriptive-correlational study is comprised of all firms listed on Tehran stock exchange during the years 2010 to 2014. From this population, a sample of 155 firms is created through systematic elimination. The research hypotheses are investigated via multivariate regression, integrated data model and estimated generalized least squares (EGLS) methods. This research uses panel data technique as its statistical method, and utilizes Eviews9 and Excel softwares for data analysis. Results of investigations show that value of financial flexibility has significant inverse relationship with firm’s dividend payouts, its financial leverage, and the change in its cash balance. The results also suggest that firms putting more value to their financial flexibility have lower dividend payouts, prefer stock redemption to paying dividends, have lower leverage ratios, and tend to accumulate more cash.

Insiders' Tax Preferences and Firms' Choices between Dividends and Share Repurchases

This paper investigates whether corporate payout policy is associated with insiders' share holdings and their tax preferences. We find that insider ownership and the implied tax liabilities are positively related to a firm's propensity to employ share repurchases. Firms with higher levels of or greater increases in insider ownership prefer stock repurchases to cash dividends. This relation is more significant in years when dividends were more tax disadvantaged relative to capital gains. Our findings are robust to the endogeneity of insider ownership and the inclusion of various control variables such as firm size, permanence of cash flows, growth opportunities, institutional ownership, and executive stock options. Overall, our results suggest that personal tax considerations from insiders affect corporate payout decisions.