Acquisitions Driven By Stock Overvaluation: Are They Good Deals?
Overvaluation may motivate a firm to use its stock to acquire a target whose stock is not as overpriced (Shleifer and Vishny (2003)). Though hypothetically desirable, these acquisitions in practice create little, if any, value for acquirer shareholders. Two factors often impede value creation: payme...
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| Format: | text |
| Language: | English |
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Institutional Knowledge at Singapore Management University
2011
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| Online Access: | https://ink.library.smu.edu.sg/lkcsb_research/3157 https://ink.library.smu.edu.sg/context/lkcsb_research/article/4156/viewcontent/FuFJCFE_10_1.pdf |
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| Institution: | Singapore Management University |
| Language: | English |
| Summary: | Overvaluation may motivate a firm to use its stock to acquire a target whose stock is not as overpriced (Shleifer and Vishny (2003)). Though hypothetically desirable, these acquisitions in practice create little, if any, value for acquirer shareholders. Two factors often impede value creation: payment of a large premium to the target and lack of economic synergies in the acquisition. We find that overvaluationdriven stock acquirers suffer worse operating performance and lower long-run stock returns than control firms that are in the same industry, similarly overvalued at the same time, have similar size and Tobin’s q, but have not pursued an acquisition. Our findings suggest that stock overvaluation increases agency costs and the resulting actions potentially benefit managers more than shareholders (Jensen (2005)). |
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