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Does the Disposition Effect Matter in Corporate Takeovers? Evidence from Institutional Investors of Target Companies

Published online by Cambridge University Press:  07 April 2014

Pengfei Ye
Pengfei Ye*
Affiliation:
yep@rpi.edu, Lally School of Management and Technology, Rensselaer Polytechnic Institute, 110 8th St, Troy, NY 12180.
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Abstract

This paper examines whether one of the most important participants in the takeover market, the institutional investors of target companies, suffers from the disposition effect and, if so, how this selling bias influences the takeover outcomes. I report robust evidence that target institutional investors are reluctant to realize losses. This bias further allows their sunk cost to affect both the takeover price and the deal success. My results are explained by neither the undervalued targets nor the 52-week-high price effect. They are most pronounced among targets whose investors have a strong propensity to hold on to loser stocks.

Type
Research Articles
Information
Journal of Financial and Quantitative Analysis , Volume 49 , Issue 1 , February 2014 , pp. 221 - 248
Copyright
Copyright © Michael G. Foster School of Business, University of Washington 2014 

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