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)).
Mergers and acquisitions, Overvaluation, Operating performance, Agency costs, CEO compensation
Corporate Finance | Finance and Financial Management
European Finance Association Meeting, 17-20 August 2011
City or Country
FU, Fangjian; LIN, Leming; and OFFICER, Micah.
Acquisitions Driven By Stock Overvaluation: Are They Good Deals?. (2011). European Finance Association Meeting, 17-20 August 2011. Research Collection Lee Kong Chian School Of Business.
Available at: http://ink.library.smu.edu.sg/lkcsb_research/3157
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