Corporate Acquisition Behaviour



Consistent with neo-classical rational theory, prior studies show that mergers are driven by rational expectations of growth options, synergies or reallocation of assets in a response to industry shocks. The rational view includes real options models, (e.g., Smit and Trigeorgis 2004) as valuable growth opportunities.

Contrary to rational theory, behavioral views offer alternative explanations for the drivers of mergers and acquisitions (Baker et al. 2007). First, decision makers - the bidders’ CEOs and management teams - may act irrational. CEOs may suffer from overconfidence and over-optimism (Roll 1986), and managers may use their discretion to overinvest (Malmendier and Tate 2005). Second, financial market overvaluation may drive mergers.

This proposal attempts to extend the boundaries of real options analysis to environments where rivals have biases in their decision-making (as in Smit and Moraitis 2009; Smit and Lovallo 2014). In other words rationally anticipate on an irrational environment. This proposal contributes to this field by developing at least 3 papers of publishable quality on acquisitions; more specifically; divestment decisions; serial acquisitions and a panel study on the prevalence of biases using on acquisition database.


Real Options, Merger Waves, Behavioural Finance


Merges & Acquisitions activity is a mainstream finance research subject. This project incorporates both theoretical and experimental studies to takeover practice, which aims to deepen our understanding of the occurrence, prices in Merges & Acquisitions waves.

A key contribution of our analysis is extending the boundaries where real option theory and thinking to understanding acquisition behaviour and takeover premia is useful. This study will discuss how fundamental real option valuation theory can be extended with behavioural economics by dynamically modelling irrational behaviour.

This new (integrative) methodology can applied to practical examples of M&A that illustrate modern valuation techniques in relation to behavioural aspects ranging from herding behaviour in corporate acquisitions, to competitive bidding strategies and company auctions. We will use our current database of acquisitions (with co-authors).

In addition to theoretical modelling, there is an opportunity to use our contacts in the private equity industry and take advantage of the Erasmus Behavioural Lab and the ESE-econlab to conduct a laboratory experiment with actual investors or students as the subjects. Controlled environments of laboratory experiments may allow for clear comparative statistical tests of theories and allow to get a better idea about the motivation of the subjects to invest, in particular, behavioural biases on behalf of investors. As such, the laboratory experiment is an important step to validate the relevance of theoretical predictions to corporate environments and can be used as supplemental evidence to the empirical data analysis of merger waves.


The research methods depend on the specific topics chosen by the candidate and agreed upon with the supervisors.

Company valuation and theoretical modeling will incorporate a variety of features or provide alternative mechanisms explaining transactions. We will rely on insights from the traditional corporate finance and M&A theory and the growing literatures on behavioral finance and real options analysis.

We also plan to design and conduct a laboratory experiment with investors to provide more reliable evidence of the incentives and mechanisms involved.

Literature references

  • Angrist, J.D., Pischke, J.-S., 2008. Mostly Harmless Econometrics: An empiricist’s Companion, Princenton NJ: Princeton University Press. 
  • Baker, M., Ruback, R.S., Wurgler, J., 2008. Behavioral corporate finance: a survey. In The Handbook of Corporate Finance: Empirical Corporate Finance, volume 1. In Eckbo, BE. (ed). Elsevier/North Holland: New York; chapter 4.
  • Bonini, S. (2012). Secondary buy-outs. Working paper, Bocconi University.
  • Dai, Y., Gryglewicz, S., Smit, J.T.J. & De Maeseneire, W. (2013). Similar Bidders in Takeover Contests. Games and Economic Behavior, 82, 544-561.
  • Harris, R. S., T. Jenkinson, and S. N. Kaplan (2013). Private equity performance: What do we know? The Journal of Finance, forthcoming.
  • Kahneman, D., Lovallo, D., 1993. Timid choices and bold forecasts: a cognitive perspective on risk taking. Management Science. 39(1), 17-31.
  • Kaplan, S. N. and A. Schoar (2005). Private equity performance: Returns, persistence and capital flows. The Journal of Finance 60(4), 1791-1823.
  • Kaplan, S. and P. Stromberg (2009). Leveraged buyouts and private equity. Journal of Economic Perspectives 23(1), 121-146.
  • Malmendier, U., Tate, G., 2005. CEO overconfidence and corporate investment. Journal of Finance. 60(6), 2661-2700.
  • Muscarella, C. and M. Vetsuypens (1990). Efficiency and organizational structure: A study of reverse LBOs. The Journal of Finance 45(5), 1389-1413.
  • Nikoskelainen, E. and M. Wright (2007). The impact of corporate governance mechanisms on value increase in leveraged buyouts. Journal of Corporate Finance 13, 511-537.
  • Shefrin, H. M. (2010). Behavioralizing finance. In Foundations and Trends in Finance, Volume 4, pp. 1-184. Now Publishers Inc.: Hanover MA.
  • Smit H.T.J. and L. Trigeorgis (2004). Strategic Investment: Real Options and Games. Princeton University Press: Princeton NJ.
  • Smit, H.T.J. and Lovallo, D., 2014. Creating More Accurate Acquisition Valuations, MIT Sloan Management Review, 56:1, 63-72.
  • Smit, H.T.J. and Moriatis, T., 2015. Playing at Acquisitions. Princeton University Press: Princeton NJ (in Press)
  • Wang, Y. (2012). Secondary buyouts: Why buy and at what price? Journal of Corporate Finance 18, 1306-1325.
  • Wright, M., J. Gilligan, and K. Amess (2009). The economic impact of private equity: What we know and what we would like to know. Venture Capital: An International Journal of Entrepreneurial Finance 11(1), 1-21.

Data sources
The project would rely on a number of state-of-the-art financial datasets available at Erasmus University Rotterdam and hand-collected data on private companies and PE funds portfolios.

Expected output

Over the time of the PhD project we expect to produce at least 3 academic papers potentially covering a theoretical model and an experimental test of its predictions.

The quality of the work should be justified by two or three publications in reputable finance, and general-interest journals and conference volumes. In the near term, the papers will be submitted for presentation at international conferences (AFA, EFA, FMA, specialized meetings) and seminars.

Finally the work will be bundled into a PhD thesis.


Cooperation with Erasmus Behavioural Lab (EBL) and Applied Economics may provide useful synergies in decision theory, game theory and behavioural economics applied to acquisitions of firms. The proposal also fits neatly into the ERIM research program on Finance and Accounting and the Tinbergen research group on Financial and International Markets.

Different tenure trackers at the finance section will be involved in this PhD project. It is also related to existing PhD projects in Private Equity and Takeovers creating synergy. While the supervisor(s) will be in charge of the daily supervision at the EUR, the candidate may benefit from a broader network of scholars working in the field with which the supervisors have contacts in the US and Australia (e.g., Berkeley and Sydney Business School, Prof Dan Lovallo; or Harvard Business School, Prof Carliss Baldwin).

In addition, we plan to establish working contacts with Prof. Lenos Trigeorgis and the Real Options Group (, a group of well-known and respected academics and practitioners specializing in real options. Potential contacts with leading figures in Private Equity research would be also helpful.

Societal relevance

Besides its scientific interest this project has broad general implications for businesses, investors, financial analysts, policymakers and regulators.

  1. Normative company valuation models that deal better with bounded rationality in financial markets or mitigate investor uncertainty biases are of interest to investors, financial analysts and consultants.
  2. Behavioral theory for acquisition decisions matter for CEOs and the debate on the governance of companies.
  3. Acquisitions impact financial markets through capital financing and banks (providing financing).
  4. Acquisitions are an important source of company growth, impacting globalization. Merger waves matter for financial stability and can guide policymakers in their debate about financial regulation.

Scientific relevance

Fundamentally: Real option theory considers investment under uncertainty. Extending real option theory with biases of decisions under uncertainty seems a natural contribution of significant importance to this field of real options.

Applied: The study also may provide new insights for merger waves and excessive prices for takeovers of growth stocks. (See the Item Research problem and research question).

PhD candidate profile

  • Highly motivated to do research in Corporate Finance and to pursue Doctoral studies. 
  • Mature and representative for contacts in the industry, able to maintain contacts with PE investors and executives.
  • Ability and motivation to work hard; fast learning; scientific creativity.
  • Genuine interest in academic research in general and empirical research related to the present project and its practical implications in particular.
  • Able to teach in the master programme on this specific subject
  • Good knowledge of English (writing, speaking), excellent teaching ability and interest to teach and supervise undergraduate students.
  • Computer literacy: some knowledge of statistical packages (Stata, SAS) is an advantage.
  • Good analytical skills; competitive grades on standard graduate admission tests (GRE, GMAT).

Contact information

For academic questions only. For procedural questions, contact the Doctoral Office.


Monday, 15 January 2018