Acquirer Reference Prices and Acquisition Performance

In a comprehensive sample of mergers and acquisitions, we find a reference price effect: Acquirers earn higher (lower) announcement-period returns when their pre-announcement stock prices are well below (near) their 52-week highs. This reference price effect is stronger in acquisitions of private targets, deals involving greater uncertainty, and acquirers with greater individual investor ownership, and it is reversed in the subsequent year. Further, acquirer reference prices affect bid premia and target announcement-period returns in deals with greater uncertainty in acquirer valuation. The overall evidence is consistent with investors irrationally using 52-week high prices as a measure of acquirer valuation