boone/mulherin (jfe 2008): do auctions induce a winner’s
TRANSCRIPT
Boone/Mulherin (JFE 2008):Do auctions induce a winner’s curse? New
evidence from the corporate takeover market
FIN 803 Corporate Finance (Prof. Maug)
Amaraa-Daniel Zogbayar
April 22, 2016
FIN 903
April 22, 2016
The Winner’s Curse (Hypothesis)
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• Disequilibrium behavior: Winning bidders systematically overbid
• Predictions: Bidder returns are inversely related to
1. Level of competition in a given deal (e.g., Kagel/Levin 1986)
2. Uncertainty concerning the value target (e.g., Bazerman/Samuelson 1983)
• Source: Bazerman/Samuelson 1983
• Variables
E=estimates
B=bid
• Assumptions:
True Value ≈ Ē
Common value
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April 22, 2016
Alternative Hypotheses
3
A hypothesis of a competitive takeover market
Quotation: “When there are at least two non-colluding firms in an industry, there
is no clear-cut relationship between the number of firms and the degree of
competition” (Fama/Laffer 1972, p. 674)
Prediction:
No relation between bidder returns and either number of bidders or
uncertainty in value of target (so no systematic errors)
Optimal contracting hypothesis
Intuition: stock-swap offers allow former target shareholders to participate in
future wealth gains thus mitigating information asymmetry problem
(Officer/Poulsen/Stegemoller 2009)
Prediction:
Positive relation between bidder returns and the uncertainty in the value of
the target
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Motivation
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Problems related to existing empirical literature
Noisy proxies for takeover competition
Mostly limited to publicly announced bidders in a takeover
Potential bias due to endogeneity
Level of competition in takeovers and wealth effects of bidders are jointly
determined
Lack of a benchmark market value for auctioned assets
Controlled experiments (alternative option) are often subject to bias as
well and do not capture richness of institutional features
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April 22, 2016
Addressing Empirical Challenge I:
Better Proxy for Takeover Competition
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High level of competition
Low level of competition
High variance
Low variance
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April 22, 2016
(Biased?) OLS Results (1/2)
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Prediction (Winner’s Curse)Results:
No evidence for winner’s curse
hypothesis
Some evidence for optimal
contracting hypothesis
[However, results of
Officer/Poulsen/Stegemoller
(2009) are related to interaction
between proxies for uncertainty
and method of payment]
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April 22, 2016
(Biased?) OLS Results (2/2)
7
Controls Yes Yes Yes Yes
Adjusted R2 0.144 0.147 0.149 0.144
Results
Some support for winner’s curse hypothesis (if one-tailed test is used)
Only small changes in adjusted R2
L
FIN 903
April 22, 2016
Addressing Empirical Challenge II:
Simultaneous equations analysis (1/2)
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Controls Yes Yes Yes Yes
Instrument validity
• Relevance:
Based on auction theory
Indicated by Boone/Mulherin,
but statistical tests is not provided
• Exogeneity:
Indicated by Boone/Mulherin,
but statistical test is not provided
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April 22, 2016
Addressing Empirical Challenge II:
Simultaneous equations analysis (2/2)
9
Results
No evidence for winner’s curse hypothesis, even if one-tailed test is used
L
FIN 903
April 22, 2016
Contributions
10
Winner’s curse literature
No empirical evidence supporting winner’s curse in takeovers after
addressing potential bias due to endogeneity
Better explanation for break even bidder returns
Better proxies for underlying competition
Implication for security law
No winner’s curse mitigates motivation for governmental regulation
Behavioral finance
Participants seem to have “incentives and ability to devise solutions to
informational complexities”
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April 22, 2016
Discussion
11
External validity
Winner’s curse in other fields (construction contracts etc.)?
Proxy for actual variance of value estimates (uncertainty)
Good proxy (see e.g. McNichols/Stubben 2015)?
Interactions to be considered (see e.g. Officer/Poulsen/Stegemoller 2009)
Event study
Bidder return – good signal for winner being cursed?
Anticipations?
Confounding events?
Instrument validity/misspecification of functional form (probit)
Lack of transparency (validity)?
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April 22, 2016
Bazerman, M., Samuelson, W. 1983. I won the auction but don’t want the prize. Journal of
Conflict Resolution 27, 618–634.
Boone, A. L., and J. H. Mulherin. 2008. Do auctions induce a winner’s curse? New
evidence from the corporate takeover market. JFE 89, 1–19.
Fama, E., and A. Laffer. 1972. The number of firms and competition. AER 62, 670–674.
Kagel, J., and D. Levin. 1986. The winner’s curse and public information in common value
auctions. AER 76, 894–920.
McNichols, M. F., and S. R. Stubben. 2015. The effect of target-firm accounting quality on
valuation in acquisitions. Review of Accounting Studies 20: 110–140.
Officer, M., A. Poulsen, and M. Stegemoller. 2009. Target-firm information asymmetry
and acquirer returns. Review of Finance 13, 467–493.
References
FIN 903
April 22, 2016
Addressing Empirical Challenge IV (Selection Bias):
Two-step Regression Analysis (Heckman)
B2