Merger and acquisition (M&A) pricing has traditionally been conducted using Corporate Finance theory that relates to valuation methods like discount cash flow analysis, price-earnings ratio, transaction multiples. However, Behavioural Finance researchers have started to find that there are psychological factors that impact the valuation of financial assets, which includes pricing mergers and acquisitions. An empirical study by Baker, Pan and Wurgler (2009) found that the 52-week high stock price can become an anchor for the price offered to a potential target firm in an M&A transaction. This thesis develops a Two-person Merger & Acquisition model using incomplete information, prospect theory and real options games to model behavioural factors in pricing of such M&A transactions. The results of this thesis show that the mid-point of the offer price provided by the acquirer is usually accepted by the target in incomplete information games. However, this changes when prospect theory and real options games scenarios are considered. In brief, this thesis shows that it is critical to include behavioural biases in the valuation of M&A transactions as it can change the equilibrium price compared to the use of traditional Corporate Finance models
