Empirical Evidence of Overbidding in M&A Contests

Abstract

Surprisingly few papers have attempted to develop a direct empirical test for overbidding in merger and acquisition contests. We develop such a test grounded on a necessary condition for profit-maximizing bidding behavior. The test is not subject to endogeneity concerns. Our results strongly support the existence of overbidding. We provide evidence that overbidding is related to conflicts of interest, but also some indirect evidence that it arises from failing to fully account for the winner’s curse.