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Misvaluation and Financial Constraints: Method of Payment and Buyer Identity in Mergers & Acquisitions

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  • Berg, Aron

    () (Research Institute of Industrial Economics (IFN))

Abstract

The paper studies how stock price misvaluation and financial frictions affect whether an acquisition occurs between or within industries and whether the acquirer pays in cash or stocks. I set up a model where stock market misvaluation correlates within industries and across industries and assume that managers have private information regarding their own firm and firms similar to it. The model yields predictions regarding which firm acquires which firm, and the method of payment used in transactions.

Suggested Citation

  • Berg, Aron, 2017. "Misvaluation and Financial Constraints: Method of Payment and Buyer Identity in Mergers & Acquisitions," Working Paper Series 1157, Research Institute of Industrial Economics.
  • Handle: RePEc:hhs:iuiwop:1157
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    References listed on IDEAS

    as
    1. Fishman, Michael J, 1989. " Preemptive Bidding and the Role of the Medium of Exchange in Acquisitions," Journal of Finance, American Finance Association, vol. 44(1), pages 41-57, March.
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    5. Eckbo, B Espen & Giammarino, Ronald M & Heinkel, Robert L, 1990. "Asymmetric Information and the Medium of Exchange in Takeovers: Theory and Tests," Review of Financial Studies, Society for Financial Studies, vol. 3(4), pages 651-675.
    6. Vermaelen, Theo & Xu, Moqi, 2014. "Acquisition finance and market timing," Journal of Corporate Finance, Elsevier, vol. 25(C), pages 73-91.
    7. Michael Gort, 1969. "An Economic Disturbance Theory of Mergers," The Quarterly Journal of Economics, Oxford University Press, vol. 83(4), pages 624-642.
    8. Gregor Andrade & Mark Mitchell & Erik Stafford, 2001. "New Evidence and Perspectives on Mergers," Journal of Economic Perspectives, American Economic Association, vol. 15(2), pages 103-120, Spring.
    9. Kaplan, Steven, 1989. "The effects of management buyouts on operating performance and value," Journal of Financial Economics, Elsevier, vol. 24(2), pages 217-254.
    10. Srdan Komlenovic & Abdullah Mamun & Dev Mishra, 2011. "Business cycle and aggregate industry mergers," Journal of Economics and Finance, Springer;Academy of Economics and Finance, vol. 35(3), pages 239-259, July.
    11. Di Giuli, Alberta, 2013. "The effect of stock misvaluation and investment opportunities on the method of payment in mergers," Journal of Corporate Finance, Elsevier, vol. 21(C), pages 196-215.
    12. James S. Ang & Yingmei Cheng, 2006. "Direct Evidence On The Market-Driven Acquisition Theory," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, vol. 29(2), pages 199-216.
    13. Boyan Jovanovic & Peter L. Rousseau, 2008. "Mergers as Reallocation," The Review of Economics and Statistics, MIT Press, vol. 90(4), pages 765-776, November.
    14. Milgrom, Paul R & Weber, Robert J, 1982. "A Theory of Auctions and Competitive Bidding," Econometrica, Econometric Society, vol. 50(5), pages 1089-1122, September.
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    17. Harford, Jarrad, 2005. "What drives merger waves?," Journal of Financial Economics, Elsevier, vol. 77(3), pages 529-560, September.
    18. Rhodes-Kropf, Matthew & Robinson, David T. & Viswanathan, S., 2005. "Valuation waves and merger activity: The empirical evidence," Journal of Financial Economics, Elsevier, vol. 77(3), pages 561-603, September.
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    25. repec:hrv:faseco:30748164 is not listed on IDEAS
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    More about this item

    Keywords

    Mergers and acquisitions; Investments; Asymmetric information; Stock misvaluation; Financial frictions;

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance

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