Quasi - Rationality in Action：A Study ofpsychological factors in merger decision-making.doc

Quasi - Rationality in Action：A Study ofpsychological factors in merger decision-making QUASI-RATIONALITY IN ACTION: A STUDY OFPSYCHOLOGICAL FACTORS IN MERGER DECISION-MAKINGby*James A. FantoThis Article shows how recent behavioral and psychological literature is usefulfor understanding merger decision-making by conducting a psychologically-oriented empiricalstudy that reveals the presence of psychological motivations or factors in mega-merger decision-making. The data set is the 710 largest stock-for-stock mega-mergers for each of the last threeyears–the heyday of the mega-mergers. It first situates the Article in an ongoing study of themega-merger “wave” and presents the necessary behavioral and psychological background tothe 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 ofthe 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 ofthem. To reinforce the shareholder value destruction in the mega-mergers, the Article alsoprovides evidence of value loss in the 30 mega-mergers. Finally, it discusses the implications ofthe 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 6#00aa00view of thisdecision-making by both boards of directors and shareholders. It also argues that bothcorporate law and federal securities laws require reform so that regulators and courts canaddress the influence of psychological factors in merger decision-making. The Article concludesby offering examples of possible legal reform.I.INTRODUCTION2II.AN ONGOING STUDY OF MEGA-MERGERS6III.A (PARTIAL) REVIEW OF THE BEHAVIORAL AND PSYCHOLOGICAL LITERATURE..9IV.METHOD AND DATA16V.TABULAR RESULTS AND ANALYS