Acquisitions Driven by Stock Overvaluation: Are They Good Deals?
Publication Type
Conference Paper
Publication Date
12-2008
Abstract
Stock overvaluation might drive a firm to use its stock to acquire another firm whose stock is not overpriced to the same extent. Though hypothetically desirable, these acquisitions end up bringing little benefit, if any, to acquirer shareholders. Two factors, acquirers paying a large premium to the target and investors’ correction of acquirer stock overvaluation, move the stock prices of the acquirer and target in different directions during the acquisition process, resulting in little relative overvaluation between the two merging firms on the date of completion. Acquisitions driven by stock overvaluation often have negative economic synergies, which further doubts that the true motivation of these deals is for the benefit of acquirer shareholders. Acquirer CEOs obtain a large amount of new stock and option grants after acquisitions and realize a net gain in wealth. The findings support Jensen’s (2005) proposition that stock overvaluation increases agency costs. Acquisitions driven by stock overvaluation benefit managers more than shareholders.
Keywords
Mergers and acquisitions, Takeovers, Overvaluation, Agency costs, CEO compensation
Discipline
Finance and Financial Management | Portfolio and Security Analysis
Publisher
The 16th conference on the theories and practices of securities and financial markets (SFM)
City or Country
Taiwan (*Winner of the Best Paper Award)
Citation
FU, Fangjian; LIN, Leming; and OFFICER, Micah.
Acquisitions Driven by Stock Overvaluation: Are They Good Deals?. (2008).
Available at: https://ink.library.smu.edu.sg/lkcsb_research/3041