Falling Prey to Bias? The Influence of Advisors on the Manifestation of Cognitive Biases in the Pre-M&A Phase of Organizations

Abstract

Our study demonstrates that the pre-M&A phase provides breeding ground for irrational behavior in the form of cognitive biases. These biases not only arise within acquiring and acquired firms, but M&A advisors themselves are also prone to effort-saving techniques and subconscious biases, which may be reflected in the client’s M&A decision-making process. Cognitive biases stem from the contractual client–advisor relationship that elicits time pressure, standardization, and emotionality—that is, circumstances that favor the employment of effort-saving techniques. These biases lead to complex decisions based on the selective collection, framing and evaluation of data, the overestimation of one’s rationality, ability and deal likelihood, the illusion of control, and one-sided views. Such a biased evaluation of information is likely to induce the selection of a non-optimal target or acquirer or simply forcing a deal that should not be made in the first place. Hence, these cognitive biases can be seen as a source for consequent M&A failure. With the identification of cognitive biases and bias-fostering circumstances, our study allows for awareness and consequent mitigation of such blind spots, thereby improving decision-making processes in the pre-M&A phase via the introduction of “debiasing” strategies and the creation of favorable conditions for rational reasoning.