Managerial gambling attitudes: evidence from bank acquisitions

Abstract

Purpose

This study investigates the implications of the cumulative prospect theory in the context of US bank acquisitions, with particular emphasis on its probability weighting component. Specifically, we examine whether gambling attitudes matter in US bank takeover decisions. The evidence demonstrates that offer price premiums and target announcement returns are much higher in bank takeover transactions involving targets with gambling (lottery) features (high skewness, high volatility, and low price). Overall, the results indicate that banking acquisitions are influenced by gambling attitudes.

Design/methodology/approach

To measure idiosyncratic skewness, we follow Harvey and Siddique (2000) and Kumar (2009) and decompose total skewness into its idiosyncratic and systematic components.

Findings

The evidence demonstrates that offer price premiums and target announcement returns are much higher in bank takeover transactions involving targets with gambling (lottery) features (high skewness, high volatility, and low price). In addition, we find that synergies and bidder announcement returns are lower in lottery‐type acquisitions. The patterns we document are stronger when bidding banks are bigger, target banks are smaller, investor sentiment is above the median, and the Chicago Fed National Activity Index is negative.

Originality/value

This is an original piece of work in the field of banking.

Citation

Doukas, J.A. and Zhang, W. (2013), "Managerial gambling attitudes: evidence from bank acquisitions", Review of Behavioral Finance, Vol. 5 No. 1, pp. 4-34. https://doi.org/10.1108/RBF-09-2012-0016