Question: Baker, M., Pan, X. and Wurgler, J., (2012), “The effect of reference point prices on mergers and acquisitions”

Question

The following paper is given:

Baker, M., Pan, X. and Wurgler, J., (2012), “The effect of reference point prices on mergers and acquisitions”, Journal of Financial Economics, 106, 49-71.

Open AI software, ChatGPT, has been asked to critically evaluate the paper three different times and it produced three different outputs, which are provided below:

Output 1

Overall, the paper provides a thorough analysis of the impact of reference point prices on mergers and acquisitions. The authors use a large sample size and a variety of statistical methods to support their findings. They also provide a comprehensive review of the literature on the topic, which adds to the credibility of their research.

However, there are some limitations to the study. For example, the authors acknowledge that valuing a company is subjective and that relative bargaining power cannot be fully established. This means that the appropriate target price cannot be set with precision, which could affect the accuracy of the results. Additionally, the authors use a relatively simple model to analyze the data, which may not capture all of the complexities of the merger and acquisition process.

Furthermore, the authors do not address the potential ethical implications of using reference point prices in negotiations. For example, if a bidder is aware that a target company has recently reached a peak price, they may use this information to their advantage and offer a lower price than they would otherwise. This could be seen as unfair or unethical, and the authors do not explore this issue in depth.

Overall, while the paper provides valuable insights into the impact of reference point prices on mergers and acquisitions, it is important to consider the limitations of the study and the potential ethical implications of the findings.

Output 2

The paper "The effect of reference point prices on mergers and acquisitions" by Baker, Pan, and Wurgler provides a comprehensive analysis of the influence of reference point prices on various aspects of merger and acquisition activity. The authors present a compelling argument supported by a robust empirical analysis using a large sample size and thorough statistical methods. The study sheds light on the biases in offer prices, the impact on offer acceptance probabilities, and the reactions of bidder shareholders, providing valuable insights into the behavioural aspects of M&A transactions.

One of the strengths of the paper is its thorough review of the existing literature, which contextualizes the research within the broader field of behavioural corporate finance. The authors also acknowledge the limitations of traditional valuation models and provide a compelling alternative perspective that considers the psychological influences on the decision-making process in M&A transactions.

However, the study has some limitations. While the empirical analysis is extensive, the paper could benefit from a more in-depth discussion of the potential ethical implications of using reference point prices in negotiations. Additionally, the authors acknowledge the subjective nature of company valuation and relative bargaining power, which could introduce uncertainties into the analysis.

Furthermore, the paper could explore the implications of its findings for corporate governance and regulatory frameworks. Understanding how reference point prices influence M&A decisions could have implications for policy and governance practices in the corporate sector.

In conclusion, while the paper provides valuable insights into the impact of reference point prices on M&A activity, it is important to consider the limitations of the study and the broader implications of the findings for corporate governance and ethical considerations in M&A negotiations.

Output 3

The paper "The effect of reference point prices on mergers and acquisitions" by Baker, Pan, and Wurgler has been subject to academic scrutiny and has received both praise and criticism.

One study by Loughran and Vijh (2013) argues that the authors' findings may be driven by factors other than reference point prices, such as the target's fundamental value or the bidder's strategic motives. The authors also suggest that the study's focus on peak prices may not be the most appropriate measure of reference points, as other factors such as moving averages or analyst price targets may be more relevant.

Another study by Kolasinski and Li (2015) supports the authors' findings and suggests that reference point prices play a significant role in M&A activity. The authors argue that the use of reference points can simplify the valuation process and reduce the complexity of negotiations, leading to more efficient outcomes.

Overall, while the paper has received some criticism, it has also been widely cited and has contributed to the growing body of literature on the behavioural aspects of corporate finance. The authors' findings have important implications for understanding the decision-making process in M&A transactions and highlight the need for further research in this area.

Questions:

Part A (70%)

Please critic each one of the outputs provided above. Please use evidence from the literature where possible to support your answers.

If you were to critically evaluate the paper, what other points would you add?

(70%)

Part B (30%)

Please identify and discuss another a paper from a high-quality journal that employs the same behavioural concept as the paper by Baker, Pan and Wurgler (2012) provided.

(30%)