1.2.3 Theoretical Motives Behind M & A
2.1.3 Theoretical motives behind M & A
2.1.2.1 Behavioural Finance theory
A behavioural perspective states that industry shocks may trigger merger waves. According to Roll (1986), managers are highly confident with bull markets since they are already performing well. This results to an increase in overestimation of the expected effect of synergies from the M&A transactions which end up getting punished by realities. Shareholders and investors are usually overconfident and assume greater synergy gains and as a result, they overvalue the present value of the expected cash flow. This shows the negative marginal effects of the value that is created from deals that are conducted during bubble periods.
2.1.2.2 Classical financial theory
The origin of classical financial theory as well as the conception of modern financial markets is the Irving Fishers theories of intrinsic value together with the separation theorem. Berk and DeMarzo (2011) argues that the theory of intrinsic value is about the sum of future income discounted back to its present value while the separation theorem states that all financial entities have a goal of maximizing their …show more content…
Even when there are no potential synergies for mergers, some firms still end up engaging in transactions and this is because of the overconfidence of managers in their ability of realizing synergies. Hubris hypothesis implies a price decline in the stock price of the bidder upon the announcement of a bid (Roll 1986). Making of bids by the managers that are based on any incorrect valuation of the target firm is sufficient for the hubris hypothesis to hold. The management can have intensions that are in line with the interests of the shareholders, but their actions can turn out to be wrong. If all acquisitions attempts were encouraged by hubris, then shareholders may end up forbidding managers from making
2.1.2.1 Behavioural Finance theory
A behavioural perspective states that industry shocks may trigger merger waves. According to Roll (1986), managers are highly confident with bull markets since they are already performing well. This results to an increase in overestimation of the expected effect of synergies from the M&A transactions which end up getting punished by realities. Shareholders and investors are usually overconfident and assume greater synergy gains and as a result, they overvalue the present value of the expected cash flow. This shows the negative marginal effects of the value that is created from deals that are conducted during bubble periods.
2.1.2.2 Classical financial theory
The origin of classical financial theory as well as the conception of modern financial markets is the Irving Fishers theories of intrinsic value together with the separation theorem. Berk and DeMarzo (2011) argues that the theory of intrinsic value is about the sum of future income discounted back to its present value while the separation theorem states that all financial entities have a goal of maximizing their …show more content…
Even when there are no potential synergies for mergers, some firms still end up engaging in transactions and this is because of the overconfidence of managers in their ability of realizing synergies. Hubris hypothesis implies a price decline in the stock price of the bidder upon the announcement of a bid (Roll 1986). Making of bids by the managers that are based on any incorrect valuation of the target firm is sufficient for the hubris hypothesis to hold. The management can have intensions that are in line with the interests of the shareholders, but their actions can turn out to be wrong. If all acquisitions attempts were encouraged by hubris, then shareholders may end up forbidding managers from making