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Acquisitions driven by stock overvaluation: Are they good deals?

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  • Fu, Fangjian
  • Lin, Leming
  • Officer, Micah S.

Abstract

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.

Suggested Citation

  • Fu, Fangjian & Lin, Leming & Officer, Micah S., 2013. "Acquisitions driven by stock overvaluation: Are they good deals?," Journal of Financial Economics, Elsevier, vol. 109(1), pages 24-39.
  • Handle: RePEc:eee:jfinec:v:109:y:2013:i:1:p:24-39
    DOI: 10.1016/j.jfineco.2013.02.013
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    Cited by:

    1. Liu, Tingting & Wu, Juan (Julie), 2014. "Merger arbitrage short selling and price pressure," Journal of Corporate Finance, Elsevier, vol. 27(C), pages 36-54.
    2. Zhu, PengCheng & Jog, Vijay & Otchere, Isaac, 2014. "Idiosyncratic volatility and mergers and acquisitions in emerging markets," Emerging Markets Review, Elsevier, vol. 19(C), pages 18-48.
    3. repec:eee:ecofin:v:44:y:2018:i:c:p:254-264 is not listed on IDEAS
    4. Christina Dargenidou & Alan Gregory & Shan Hua, 2016. "How far does financial reporting allow us to judge whether M&A activity is successful?," Accounting and Business Research, Taylor & Francis Journals, vol. 46(5), pages 467-499, August.
    5. Cai, Ye & Kim, Yongtae & Park, Jong Chool & White, Hal D., 2016. "Common auditors in M&A transactions," Journal of Accounting and Economics, Elsevier, vol. 61(1), pages 77-99.
    6. repec:eee:iburev:v:27:y:2018:i:2:p:309-327 is not listed on IDEAS
    7. Eckbo, B Espen & Makaew, Tanakorn & Thorburn, Karin S, 2017. "Are stock-financed takeovers opportunistic?," CEPR Discussion Papers 11974, C.E.P.R. Discussion Papers.
    8. repec:kap:rqfnac:v:49:y:2017:i:4:d:10.1007_s11156-017-0616-2 is not listed on IDEAS
    9. Cao, Jerry X. & Cumming, Douglas & Qian, Meijun & Wang, Xiaoming, 2015. "Cross-border LBOs," Journal of Banking & Finance, Elsevier, vol. 50(C), pages 69-80.
    10. repec:eee:finlet:v:25:y:2018:i:c:p:30-35 is not listed on IDEAS
    11. repec:eee:jfinec:v:128:y:2018:i:3:p:443-465 is not listed on IDEAS
    12. Anastasia Stepanova & Vladislav Savelyev & Malika Shaikhutdinova, 2018. "The Anchoring Effect in Mergers and Acquisitions: Evidence from an Emerging Market," HSE Working papers WP BRP 63/FE/2018, National Research University Higher School of Economics.
    13. repec:kap:jrefec:v:56:y:2018:i:3:d:10.1007_s11146-017-9649-5 is not listed on IDEAS
    14. Mario Fischer, 2015. "Challenging the payment effect in bank-financed takeovers," Journal of Management Control: Zeitschrift für Planung und Unternehmenssteuerung, Springer, vol. 26(4), pages 347-376, October.
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    16. repec:eee:quaeco:v:65:y:2017:i:c:p:227-239 is not listed on IDEAS
    17. repec:eee:iburev:v:26:y:2017:i:3:p:461-475 is not listed on IDEAS
    18. repec:ers:journl:v:xx:y:2017:i:3b:p:491-506 is not listed on IDEAS
    19. Hong Zhu & Qi Zhu, 2016. "Mergers and acquisitions by Chinese firms: A review and comparison with other mergers and acquisitions research in the leading journals," Asia Pacific Journal of Management, Springer, vol. 33(4), pages 1107-1149, December.
    20. repec:eee:eneeco:v:70:y:2018:i:c:p:190-204 is not listed on IDEAS
    21. Dutordoir, Marie & Roosenboom, Peter & Vasconcelos, Manuel, 2014. "Synergy disclosures in mergers and acquisitions," International Review of Financial Analysis, Elsevier, vol. 31(C), pages 88-100.
    22. Todtenhaupt, Maximilian & Voget, Johannes, 2017. "International taxation and productivity effects of M&As," ZEW Discussion Papers 17-014, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research.

    More about this item

    Keywords

    Mergers and acquisitions; Stock overvaluation; Operating performance; Agency costs; CEO compensation;

    JEL classification:

    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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