Abstract
AbstractThe winner's curse hypothesis states that, in any bidding situation, a party which unknowingly overestimates the value of a given object tends to bid higher than its competitors and is, therefore, more likely to win it. In a takeover the magnitude of the winner's curse is defined as the difference between the bid premium of the winning bidder and the maximum offerable premium conditional on the capital market's estimate of expected takeover gains. The magnitude of the winner's curse is predicted to increase with (1) increase in the divergence of opinion amongst acquirers with respect to the size of takeover gains, (2) increase in the degree of competition for control of the target firm and (3) increase in the pre‐acquisition profitability of the winning bidder. The empirical results provide support for the winner's course hypothesis.
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