Applied prospect theory: assessing the βs of M&A-intensive firms

Author:

Ryan Homan Garth1,van Vuuren Gary2ORCID

Affiliation:

1. postgraduate student, School of Economics, Faculty of Commerce, University of Cape Town

2. Ph.D., Professor, Centre for Business Mathematics and Informatics, North-West University, Potchefstroom Campus

Abstract

Behavioral components of Kahneman and Tversky’s (1979) prospect theory (PT) were applied to derive an adjusted Capital Asset Pricing Model (CAPM) in the estimation of merger and acquisition-intensive firms’ expected returns. The premise was that the CAPM – rooted in expected utility theory – is violated by the behavioral biases identified in prospect theory. Kahneman and Tversky’s prospect theory (1979) has demonstrated that weaknesses abound in the viability of classical utility theory predictions. For mergers and acquisitions, firms appear to be isolated from and immune to human error, yet decisions which involve the undertaking of capital-intensive projects are delegated to senior management. These individuals are prone to cognitive biases and personalized risk appetites that may (and often do) compromize attitudes and behavior when it comes to pricing risky ventures. Having established that beta estimates using linear regression are inferior, the CAPM was implemented utilizing beta estimates obtained from the Kalman filter. The results obtained were assessed for their long-term market price predictive accuracy. The authors test the reliability of the CAPM as a predictor of price, observe the rationality of human behavior in capital markets, and attempt to model premiums to adjust CAPM returns to a level that more appropriately accounts for firm specific risk. The researchers show that market participants behave irrationally when assessing M&A firms’ specific risk. Logistic regression coupled with the development of a risk premium was implemented to correct the original Kalman filter returns and was tested for improvements in predictive power.

Publisher

LLC CPC Business Perspectives

Subject

Strategy and Management,Economics and Econometrics,Finance,Business and International Management

Reference35 articles.

1. Akerlof, G. (1970). The market for lemons: Qualitative uncertainty and the market mechanism. Quarterly Journal of Economics, 84(3), 488-500. - https://www2.bc.edu/thomas-chemmanur/phdfincorp/MF891%20papers/Ackerlof%201970.pdf

2. The effect of reference point prices on mergers and acquisitions

3. Bentham, J., & Bowring, J. (1843). The Works of Jeremy Bentham (Vol. 7).

4. Earnings Manipulation, Pension Assumptions, and Managerial Investment Decisions

5. Bernhardt, T., Erlinger, D., & Unterreiner, L. (2014). IFRS 9: the new rules for hedge accounting from the risk management perspective. ACRN Journal of Finance and Risk Perspectives, 3(3), 53-66.

同舟云学术

1.学者识别学者识别

2.学术分析学术分析

3.人才评估人才评估

"同舟云学术"是以全球学者为主线,采集、加工和组织学术论文而形成的新型学术文献查询和分析系统,可以对全球学者进行文献检索和人才价值评估。用户可以通过关注某些学科领域的顶尖人物而持续追踪该领域的学科进展和研究前沿。经过近期的数据扩容,当前同舟云学术共收录了国内外主流学术期刊6万余种,收集的期刊论文及会议论文总量共计约1.5亿篇,并以每天添加12000余篇中外论文的速度递增。我们也可以为用户提供个性化、定制化的学者数据。欢迎来电咨询!咨询电话:010-8811{复制后删除}0370

www.globalauthorid.com

TOP

Copyright © 2019-2024 北京同舟云网络信息技术有限公司
京公网安备11010802033243号  京ICP备18003416号-3