Ultimatum Game, Loss Aversion, and Status Quo Bias in Action: The Case of Privatization of PCCW

Abstract

In 2008, Pacific Century Regional Development and China Netcom Corporation, two major shareholders of Pacific Century Cyber Works (PCCW, 00008.hk), proposed privatization of the firm listed in Hong Kong Stock Exchange. Minority shareholders opposed fiercely. The proposal, although endorsed in special shareholders meeting in February 2009, was challenged in Court and overturned, due to allegations of vote-rigging in the shareholders meeting. One interesting aspect of this episode is that, while the offer by major shareholders was very attractive compare to the current share price, it is hard to understand why relatively large percentage of shareholders voted against the offer. The percentage deviates from what often found in ultimatum game experiments, as the offer proposed by the major shareholders was comparable to the median offers in a lot of ultimatum game experiments. This could be understood through loss aversion, which predict a bias towards status quo.