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Beware the Winner's CurseVictories that Can Sink You and Your Company$
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G. Anandalingam and Henry C. Lucas

Print publication date: 2004

Print ISBN-13: 9780195177404

Published to Oxford Scholarship Online: September 2007

DOI: 10.1093/acprof:oso/9780195177404.001.0001

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Origin of the Winner's Curse

Origin of the Winner's Curse

Chapter:
(p.3) 1 Origin of the Winner's Curse
Source:
Beware the Winner's Curse
Author(s):

G. Anandalingam (Contributor Webpage)

Henry C. Lucas

Publisher:
Oxford University Press
DOI:10.1093/acprof:oso/9780195177404.003.0001

The winner’s curse, at its core, is driven by information asymmetry because the buyer does not know the true value of the acquisition. Overpayment occurs beyond auctions; in fact, the possibility of overpaying arises in a large number of business decisions. The problem is further exacerbated in competitive bidding situations when there are other potential buyers and time to make decisions is compressed. Overvaluing an acquisition has led to reductions in gains, high debt loads, and decreases in the stock price of the firm involved. All of these situations are examined with a combination of accessible theory and very current examples.

Keywords:   auctions, overpayment, acquisitions, information asymmetry, competitive bidding

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