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Does market misvaluation drive post-acquisition underperformance in stock deals?

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  • Lin, Hsuan-Chu
  • Chou, Ting-Kai
  • Cheng, Jia-Chi
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    Abstract

    There is limited direct evidence on the impact of market misvaluation on acquirer long run performance. In this paper, we hypothesize that stock prices of stock-financed acquirers would move toward their fundamental value in the long run, thus correcting the initial overvaluation. Empirical results show that more overvalued acquirers are associated with poorer post-acquisition abnormal returns. We eliminate the concern that our findings are due to either overpayment or overvaluation-driven bad acquisitions. Our results are robust to controlling for market-wide valuation, alternative methods and assumptions used to calculate abnormal returns and fundamental value, and other factors affecting acquirer returns.

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    File URL: http://www.sciencedirect.com/science/article/pii/S1059056010001371
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    Bibliographic Info

    Article provided by Elsevier in its journal International Review of Economics & Finance.

    Volume (Year): 20 (2011)
    Issue (Month): 4 (October)
    Pages: 690-706

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    Handle: RePEc:eee:reveco:v:20:y:2011:i:4:p:690-706

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    Web page: http://www.elsevier.com/locate/inca/620165

    Related research

    Keywords: Misvaluation Mergers and acquisitions Long-run performance Residual income valuation;

    References

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