PhD Defence: Acquisitions Through a Behavioural and Real Options Lens


The 2013 Nobel Prize in Economics was awarded to two seemingly contrasting views in economics: the rational market view stating market prices incorporate all publicly available information (Eugene Fama, University of Chicago) and the behavioural view showing market prices can also incorporate irrational (human) elements (Robert Schiller, Yale University). In his PhD dissertation entitled ‘Acquisitions Through a Behavioural and Real Options Lens’, Joris Kil considers both these views. Kil shows they can co-exist in corporate finance and management research as they can in financial market research.

Focussing on corporate acquisitions, the rational acquisition view states firstly that acquisitions are undertaken for their prospective value creation, and secondly that the future value can be accurately portrayed and acknowledged at the outset of the acquisition process. Differentiating between different types of acquisitions shows higher premiums are indeed paid for more valuable acquisitions, which provide a platform for future opportunities that were previously inexistent. This is especially apparent in serial acquisition strategies aimed at industry consolidation, where the higher premium paid in the first deal of the sequence reflects the future value creation of the envisioned consolidation strategy.

The irrational or behavioural acquisition view considers acquisitions are undertaken for motives other than value creation and demonstrates that the choice of acquisition targets and the risk taken are influenced by a firm’s 52-week high stock price. It appears firms whose current stock price is further from the 52-week high take more risk in their acquisitions through acquiring relatively larger targets. Despite the effort to return to the 52-week high, the negative market reaction causes shareholders of acquirers with a risk-seeking profile to lose wealth as a result of the transaction.

Finally, the influence of executive level behavioural biases on the perception of uncertainty in acquisition decisions is considered. Given the different types of uncertainty surrounding acquisition outcomes, staging the acquisition and postponing the investment until part of this uncertainty has resolved is valuable and limits losses in case of non-beneficial developments in uncertainty. Behavioural biases can cause a divergence between perceived and actual uncertainty regarding the potential acquisition outcomes, resulting in a smaller likelihood of staging the investment and a larger chance of value destruction. Taken together, the rational and irrational perspectives demonstrate the numerous factors that influence corporate acquisition decisions.

Joris Kil defended his dissertation on 5 December 2013. His supervisor was Han Smit, Professor of Corporate Finance. Other members of the Doctoral Committee were Professor Patrick Verwijmeren, Professor Taco Reus (both of Erasmus University) and Dr. T. Tong. 

About Joris Kil

Joris Kil (1984) received his VWO diploma (Nature & Health track) in 2002 from St-Odulphus Lyceum in Tilburg. After a year at the University of Arkansas, through the Campus Scholarship Program of the Fulbright Centre Amsterdam, he started the Bachelor of International Business Administration at the Rotterdam School of Management, Erasmus University (RSM), which he successfully completed in 2006. After his bachelor, he transferred to the Erasmus School of Economics (ESE) to obtain a Master in Financial Economics (2009, cum laude), and stayed there to start his Ph.D. in Finance in September 2009 at the joint research school of ESE and RSM, the Erasmus Research Institute of Management (ERIM). During his Ph.D., Joris attended academic Summer Courses at HEC Paris and CEMFI Madrid, and spend 3 months as a visiting scholar at the Wharton School (University of Pennsylvania) and the Leeds School of Business (University of Colorado, Boulder). His work has been presented at numerous international academic conferences including the annual meetings of the Academy of Behavioural Finance in Chicago (2009) and New York (2012), the annual meeting of the Strategic Management Society in Miami (2011), the PREBEM conference in Amsterdam (2013), the Real Options Group annual meeting in Tokyo (2013) and the Academy of Management annual meeting in Lake Buena Vista, FL (2013). Chapter 3 of his thesis was nominated for best doctoral paper at the 2013 Real Options Group annual meeting, while chapter 4 was awarded the best Ph.D. paper award at the annual meeting of the Academy of Behavioural Finance in 2012. Joris was a member of the ERIM Ph.D. council and actively involved with the organization of the PREBEM Ph.D. conference in Rotterdam (2011), and is a current member of the faculty council of the ESE. Since 2011, Joris teaches the Master seminar Advanced Corporate Finance: Private Equity, obtaining consistent outstanding student evaluations, and he has supervised over 30 Master theses. Joris is currently working in the Finance department of the ESE.

Abstract of Acquisitions Through a Behavioural and Real Options Lens 

This dissertation combines four studies that contribute to our understanding of corporate acquisitions by taking a behavioural and real options perspective. Chapter 2 classifies acquisitions based on real option characteristics and shows option type (single vs. compound) and option nature (shared vs. proprietary) influence the value and premium paid in acquisitions. Chapter 3 considers a specific serial acquisition strategy aimed at industry consolidation and finds higher premiums are paid for first deals in the sequence, showing part of the potential future value generated in the consolidation strategy is already reflected at the start. Chapter 4 takes a behavioural perspective and shows a stock’s historical high influences the risk firms take in their acquisitions. Firms with a larger deviation from their past stock price high initiate relatively larger deals, but are unsuccessful in their effort to return to prior stock price levels. Finally, chapter 5 merges real option theory, behavioural theory and acquisitions by considering the influence of executive level behavioural biases on the perception of acquisition outcome uncertainty. Given the uncertainties surrounding acquisitions, staging the investment through the initial purchase of a minority stake is beneficial as it allows deferring the full acquisition until outcome uncertainty has decreased. However, behavioural biases can cause disparities between perceived and actual uncertainty, resulting in inconsideration of a staged investment strategy. These insights provide a new explanation for the limited number of observed minority stake purchases prior to full-scale acquisitions.

Photos: Chris Gorzeman / Capital Images