Volume 29, Issue 4, 2020
Reexamining Merger Overpayment from the Perspective of Religiosity with a Real Option Approach
This study aims to investigate the extent to which the cultural perspective of religiosity has an impact on merger overpayment. This study examines merger and acquisition (M&A) cases of American public companies over the past forty years. In accordance with past studies, we reveal that religion has a considerable impact on a company’s operating behaviors. The main contribution of this study is that it is the first research to use real option measures and the REL ratio as a means of reexamining the issue of merger overpayment by testing the association between the bidder’s corporate attitude toward risk modeled by the religiosity exhibited at its local headquarters along with its overpayment in a merger. In this study, we try to introduce the real option method to measure the true price of a target. The results indicate that companies with a higher Catholic-to-Protestant (CP) ratio prefer to invest more in speculative assets, such as research and development (R&D) and M&A. On the other hand, companies with higher ratio of religiosity bias then to invest more conservatively. Even high CP ratio companies tend exhibit a greater preference for risk while also merging with companies that have a high market-to-book (MB) ratio, but we have no evidence to prove that they are more likely to overpay. However, all indications point toward the notion that they will not invest irrationally. Our results prove that Overpay (offer price divided by the target’s stock price) will exhibit a significant negative correlation with premiums, consistent with past studies. However, Overpay--calculated via the real option method--does not yield any significant results. As a result, we assess whether or not the real option method has appropriate applicability in cases of merger trading.
Mergers and Acquisitions; Overpayment; Religiosity; Real Option; Local Religiosity