Theory and recent evidence suggest that overvalued firms can create value for shareholders if they exploit their overvaluation by using their stock as currency to purchase less overvalued firms. We challenge this idea and show that, in practice, overvalued acquirers significantly overpay for their targets. These acquisitions do not, in turn, lead to synergy gains. Moreover, these acquisitions seem to be concentrated among acquirers with the largest governance problems. CEO compensation, not shareholder value creation, appears to be the main motive behind acquisitions by overvalued acquirers.
Mergers and acquisitions, Stock overvaluation, Operating performance, Agency costs, CEO compensation
Corporate Finance | Finance and Financial Management
Journal of Financial Economics
FU, Fangjian; LIN, Leming; and OFFICER, Micah.
Acquisitions Driven by Stock Overvaluation: Are they Good Deals?. (2013). Journal of Financial Economics. 109, (1), 24-39. Research Collection Lee Kong Chian School Of Business.
Available at: http://ink.library.smu.edu.sg/lkcsb_research/3250