Sunk Cost Bias in Decision Making: Empirical Evidence on Capital Expenditure in Mergers and Acquisitions Deals

Abstract

The aim of the study is to examine the sunk cost bias in underperforming mergers and acquisitions (M&A) deals characterized by capital spending in the post-M&A period.

For this study, the deal-specific data of 184 mergers and acquisitions transactions, from SAARC and ASEAN regions, were collected from Bursa Malaysia Library. However, Firm-specific data for acquirer and targets firms were gathered from annual reports and websites of the respective companies. Univariate and multivariate analysis were employed to capture the impact of firm performance on capital expenditures for 3 years period after M&A deals.

Research findings favor the sunk cost bias. The study further finds that underperforming M&As experienced more capital spending in the post-M&A period which implies that management is allocating more resources to failed mergers to prove them worthy.

There are number of studies on the topic based on hypothetical surveys and/or lab experiments. However, this study was conducted on frequently occurring phenomena of mergers and acquisitions. This study is quite unique/original considering the research methodology and generalizability of study findings at strategic level decisions.