The Benefits of Overvaluation: Evidence from Mergers and Acquisitions

Event Date: 18 May 2016

Speaker: Evangelos Vagenas-Nanos, University of Glasgow

Time: 2pm

Location: Strathclyde Business School, Stenhouse Wing, SW106

Abstract:

Theoretical predictions and empirical evidence debate on whether acquirers can exploit their overvalued equity and create value by purchasing less overvalued or undervalued target firms with stock as a method of payment. The theoretical predictions of Shleifer and Vishny (2003) and the empirical work of Savor and Lu (2009) argue in favour of this. On the other hand, Fu et al. (2013) and Akbulut (2013) provide evidence against. We revisit this issue and develop a quasi-experimental design through which the misvaluation effect for stock acquirers that are more overvalued than their targets is isolated and measured. Our findings offer direct evidence in favour of the Shleifer and Vishny (2003) market timing hypothesis. The overall negative long-run performance of stock acquirers is driven by signalling rather than lack of exploiting misvaluation.   

Published: 12 May 2016