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MERGER AND ACQUISITION PRICING USING AGENT BASED MODELLING

MERGER AND ACQUISITION PRICING USING AGENT BASED MODELLING Merger and Acquisition pricing utilises traditional financial models like Discount Cash flow analysis and industry multiples. These methods do not consider behaviour finance biases, for example, prospect theory (Kahneman and Tversky 1979). This paper analyses merger and acquisition pricing using behavioural bias of risk aversion (acquiring company behavioural trait) and optimism (target company trait). It then extends the study to include loss aversion from prospect theory, differences in the way humans view gains and losses based on low or high probability based on cumulative prospect theory, and finally the certainty effect (where humans prefer certain outcome to probabilistic outcomes). All these factors have an impact on merger and acquisition pricing for potential deals as acquiring and target companies behave differently and such impacts are not considered by traditional finance models. Results show that as loss aversion reduces, the positive impact of risk taking and optimism behaviours improve. Also, probabilistic gains and losses can have a positive impact, but certainty has the greatest impact. Humans prefer certain outcomes and acquirers and target company behaviours are more effective in such conditions with increasing utility for both parties under such circumstances. However, in the multiple acquirer setting, competition between the acquirer significantly increases the utility, and the loss aversion co-efficient works in the opposite direction as the perceptive difference between gains and losses decreases. JEL codes: G34; L11 Keywords: price; mergers and acquisitions (M and A); agent-based modeling http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Economics, Management, and Financial Markets Addleton Academic Publishers

MERGER AND ACQUISITION PRICING USING AGENT BASED MODELLING

NIPUN AGARWAL
Economics, Management, and Financial Markets , Volume 13 (1): 16 – Jan 1, 2018
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Publisher
Addleton Academic Publishers
Copyright
© 2009 Addleton Academic Publishers
ISSN
1842-3191
eISSN
1938-212X
Publisher site
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Abstract

Merger and Acquisition pricing utilises traditional financial models like Discount Cash flow analysis and industry multiples. These methods do not consider behaviour finance biases, for example, prospect theory (Kahneman and Tversky 1979). This paper analyses merger and acquisition pricing using behavioural bias of risk aversion (acquiring company behavioural trait) and optimism (target company trait). It then extends the study to include loss aversion from prospect theory, differences in the way humans view gains and losses based on low or high probability based on cumulative prospect theory, and finally the certainty effect (where humans prefer certain outcome to probabilistic outcomes). All these factors have an impact on merger and acquisition pricing for potential deals as acquiring and target companies behave differently and such impacts are not considered by traditional finance models. Results show that as loss aversion reduces, the positive impact of risk taking and optimism behaviours improve. Also, probabilistic gains and losses can have a positive impact, but certainty has the greatest impact. Humans prefer certain outcomes and acquirers and target company behaviours are more effective in such conditions with increasing utility for both parties under such circumstances. However, in the multiple acquirer setting, competition between the acquirer significantly increases the utility, and the loss aversion co-efficient works in the opposite direction as the perceptive difference between gains and losses decreases. JEL codes: G34; L11 Keywords: price; mergers and acquisitions (M and A); agent-based modeling

Journal

Economics, Management, and Financial Markets – Addleton Academic Publishers

Published: Jan 1, 2018

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