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Equity overvaluation, insider trading activity, and M&A premium: Evidence from China

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  • Zhang, Yongshen
  • Zhang, Qing
  • Yu, Xiaoliang
  • Ma, Qiushu

Abstract

Based on catering theory and M&A arbitrage theory, this paper focuses on the motivation and economic consequences of high premium M&A in China's capital market. The main research conclusions are as follows: First, the more equity overvaluation, the higher the merger premium and the short-term excess market return. Second, the more insider trading behaviour after equity overvaluation, the higher the merger premium and the short-term excess market return. Third, the greater the short-selling pressure after the equity overvaluation, the lower the merger premium and the weaker the short-term excess market return. Finally, this paper studies the economic consequences of M&A after equity overvaluation, and finds that M&A driven by equity overvaluation can only improve M&A performance in the current year, but cannot achieve long-term synergies. Based on the theory of M&A arbitrage, this paper studies the explanation mechanism of equity overvaluation to high-premium M&A in China's capital market, provides new evidence for executive's agency behaviour in M&A. This paper has important policy implications for the healthy development of M&A in the current emerging capital market.

Suggested Citation

  • Zhang, Yongshen & Zhang, Qing & Yu, Xiaoliang & Ma, Qiushu, 2023. "Equity overvaluation, insider trading activity, and M&A premium: Evidence from China," Pacific-Basin Finance Journal, Elsevier, vol. 80(C).
  • Handle: RePEc:eee:pacfin:v:80:y:2023:i:c:s0927538x23001130
    DOI: 10.1016/j.pacfin.2023.102047
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    References listed on IDEAS

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    More about this item

    Keywords

    Equity overvaluation; M&A premium; Insider behaviour; Short selling;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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