Round offer prices in M&A transactions: costly negotiation and psychological preference

Abstract

Purpose

The authors of this study aim to investigate possible explanations of the prevalence of price clustering in the final offer prices of mergers and acquisitions (M&A).

Design/methodology/approach

The authors use final offer price in M&A deals to investigate the price clustering phenomena. The authors used regressions and logistic regressions to examine potential factors that might affect pricing strategy by looking into one-time acquirers and experienced serial acquirers.

Findings

Price clustering increases with negotiation uncertainties characterized as competitive bidding, number of bidders, challenged deals and duration. Moreover, the authors find persistent price clustering in experienced serial acquirers that are more experienced and better equipped with handling uncertainties, suggesting a preference of using round numbers regardless of levels of uncertainties. The authors' evidence shows that price clustering results from a combination of Harris' (1991) costly negotiation hypothesis where round prices may be used to lower search costs and psychological bias and preference.

Originality/value

The authors appear to be the first to investigate alternative theories that support M&A offer price clustering behavior, finding that both the costly negotiation and psychological bias and preference theories apply to M&A final price formation. Thus, the authors' major contribution, specific to the M&A process, is a clarification of physical and psychological factors associated with bidding and negotiation behavior. The authors are confident that the authors' study impacts conventional knowledge regarding M&A deal negotiation strategies, including bidding behavior, contract negotiation, financial analysis, management practices and risk management.

Citation

Huang, Y., Hu, X., Hunsader, K. and Zheng, S.X. (2023), "Round offer prices in M&A transactions: costly negotiation and psychological preference", Managerial Finance, Vol. 49 No. 12, pp. 1917-1937. https://doi.org/10.1108/MF-11-2022-0545