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Peer selection and valuation in mergers and acquisitions

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  • Eaton, Gregory W.
  • Guo, Feng
  • Liu, Tingting
  • Officer, Micah S.

Abstract

Using unique data, this paper examines investment banks’ choice of peers in comparable companies analysis in mergers and acquisitions. We find strong evidence that product market space is amongst the most important factors in peer selection, but Standard Industrial Classification (SIC) codes, particularly three and four digit codes, do a poor job of categorizing related firms in this setting. Banks strategically select large, high growth peers with high valuation multiples, factors that are also positively related to premiums. Our evidence is consistent with target-firm advisors selecting peers with high valuation multiples to negotiate higher takeover prices.

Suggested Citation

  • Eaton, Gregory W. & Guo, Feng & Liu, Tingting & Officer, Micah S., 2022. "Peer selection and valuation in mergers and acquisitions," Journal of Financial Economics, Elsevier, vol. 146(1), pages 230-255.
    • Handle: RePEc:eee:jfinec:v:146:y:2022:i:1:p:230-255
    DOI: 10.1016/j.jfineco.2021.09.006
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    2. Paul Geertsema & Helen Lu, 2023. "Relative Valuation with Machine Learning," Journal of Accounting Research, Wiley Blackwell, vol. 61(1), pages 329-376, March.

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    More about this item

    Keywords

    Mergers and acquisitions; Valuations; Investment banks; Comparable companies analysis; Takeover premiums;
    All these keywords.

    JEL classification:

    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance
    • G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage

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