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)

2

• 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

FIN 903

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

FIN 903

April 22, 2016

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

FIN 903

April 22, 2016

Addressing Empirical Challenge I:

Better Proxy for Takeover Competition

5

High level of competition

Low level of competition

High variance

Low variance

FIN 903

April 22, 2016

(Biased?) OLS Results (1/2)

6

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]

FIN 903

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)

8

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

FIN 903

April 22, 2016

Addressing Empirical Challenge II:

Simultaneous equations analysis (2/2)

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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”

FIN 903

April 22, 2016

Discussion

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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)?

FIN 903

April 22, 2016

Thank you for your attention/

for the discussion.

FIN 903

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

Backup

FIN 903

April 22, 2016

Investment Bank Quality and Bidder Returns

B1

FIN 903

April 22, 2016

Addressing Empirical Challenge IV (Selection Bias):

Two-step Regression Analysis (Heckman)

B2

FIN 903

April 22, 2016

Operating Performance and the Winner’s Curse

B3