Quasi-Rationality in Action: A Study of Psychological Factors in Merger Decision-Making

Abstract

This Article shows how recent behavioral and psychological literature is useful for understanding merger decision-making by conducting a psychologically-oriented empirical study that reveals the presence of psychological motivations or factors in mega-merger decision-making. The data set is the 10 largest stock-for-stock mega-mergers for each of the last three years - the heyday of the mega-mergers. It first situates the Article in an ongoing study of the mega-merger wave and presents the necessary behavioral and psychological background to the empirical study. It next describes the method of the study, which involves creating a grid of psychological factors and applying it to public representations of decisions by the boards of the merging firms in the data set, in order to detect the presence of the factors in this decision-making. It then presents the results of the empirical study and offers a narrative explanation of them. To reinforce the shareholder value destruction in the mega-mergers, the Article also provides evidence of value loss in the 30 mega-mergers. Finally, it discusses the implications of the empirical study for corporate and securities law relating to mega-merger decision-making. Here it finds that courts and policy-makers accept a psychologically simplistic view of this decision-making by both boards of directors and shareholders. It also argues that both corporate law and federal securities laws require reform so that regulators and courts can address the influence of psychological factors in merger decision-making. The Article concludes by offering examples of possible legal reform.