When a firm acquires 100% of the shares in another firm and finances this acquisition with
available funds, the debt level and return on equity of the two firms in combination goes up
(under certain conditions). In three experiments, we empirically demonstrate that individuals
intuitively think these variables become lower after the acquisition, contrary to what is
actually the case. The findings stress the role of psychological processes in business
valuation and accounting and are consistent with an averaging account of judgment under …