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Averaging bias in firm acquisition processes
University of Gävle, Faculty of Education and Business Studies, Department of Business and Economic Studies, Business administration.ORCID iD: 0000-0002-5043-6289
University of Gävle, Faculty of Education and Business Studies, Department of Business and Economic Studies, Economics.
University of Gävle, Faculty of Education and Business Studies, Department of Business and Economic Studies.ORCID iD: 0000-0002-7584-2275
2022 (English)In: Journal of Behavioral and Experimental Economics, ISSN 2214-8043, E-ISSN 2214-8051, Vol. 96, article id 101809Article in journal (Refereed) Published
Abstract [en]

When a firm acquires 100% of the shares in another firm and finances this acquisition with available funds, the debt level and return on equity of the two firms in combination goes up (under certain conditions). In three experiments, we empirically demonstrate that individuals intuitively think these variables become lower after the acquisition, contrary to what is actually the case. The findings stress the role of psychological processes in business valuation and accounting and are consistent with an averaging account of judgment under uncertainty. On this view, people's judgments of objects in combination are biased toward the average rather than the sum of the objects’ individual characteristics. The experiments also show that informing the participants of the accurate evaluations removes the bias. The third experiment reinforced these results by replicating the same pattern with a sample of “high-accounting literacy” participants who all reported formal university training in accounting. One takeaway of the study is that, in acquisition settings, investors potentially could base their assessment of firm value on false premises which in turn (at least in the short run) leads to a higher level of asset mispricing and a less efficient capital market.

Place, publisher, year, edition, pages
Elsevier , 2022. Vol. 96, article id 101809
Keywords [en]
firm acquisition, debt level, return on equity, averaging bias, cognitive biases
National Category
Business Administration
Research subject
Intelligent Industry
Identifiers
URN: urn:nbn:se:hig:diva-37188DOI: 10.1016/j.socec.2021.101809ISI: 000731074200002Scopus ID: 2-s2.0-85120784810OAI: oai:DiVA.org:hig-37188DiVA, id: diva2:1604481
Available from: 2021-10-20 Created: 2021-10-20 Last updated: 2022-01-04Bibliographically approved

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Hartwig, FredrikLandström, Mats

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