Acquisitions Driven By Stock Overvaluation: Are They Good Deals?

• Main Authors: FU, Fangjian, LIN, Leming, OFFICER, Micah
• Format: text
• Language: English
• Published: Institutional Knowledge at Singapore Management University 2011
• Subjects: Mergers and acquisitions; Overvaluation; Operating performance; Agency costs; CEO compensation; Corporate Finance; Finance and Financial Management
• 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
• Institution: Singapore Management University

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)).