Independent expert valuations in takeovers: Are they biased?

CPA Australia
Publication Type:
Journal Article
Australian Accounting Review, 2006, 16 (2), pp. 19 - 24
Issue Date:
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The predictability of the opinions provided in expert reports produced in Australian takeovers has led repeatedly to public criticism. This study assesses the validity of this criticism by comparing expert valuations with the recommendations of target firm directors. The results indicate that expert valuations typically agree with directors' recommendations, with the rate of agreement being 95% for reject recommendations. Consistent with expert valuations provided in rejected takeovers being inflated, these bids are associated with similar premiums to accepted bids. Additionally, rejected offers that succeed do so at well below the expert's valuation, and prices in unsuccessful rejected offers do not increase towards the expert's valuation. Excluding bias, other possible explanations are that experts in rejected bids are genuinely over-optimistic about the prospects of these firms. Alternatively, these valuations may be structured to pressure the existing bidder into raising its offer, irrespective of whether it actually raises the price above their valuation. The results of this study are consistent with this strategy being successful, with the offer price being revised in 61% of rejected takeovers. Another possibility is that expert valuations in rejected bids are designed to encourage a competing bidder.
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