Do Overvaluation-Driven Stock Acquisitions Really Benefit Acquirer Shareholders?

Abstract

I study the effects of overvalued equity on acquisition activity and shareholder wealth, using managers' insider trades to measure overvaluation. I find that overvalued equity drives managers to make stock acquisitions, and such acquisitions destroy value for acquirer shareholders. Overvalued stock acquirers earn negative and lower returns in the short run and substantially underperform similarly overvalued nonacquirer firms in the long run. My results do not support the idea that managers can benefit shareholders by converting overvalued equity into real assets through stock acquisitions.

How Accounting Firms Compete for Financial Advisory Roles in the M&A Market

“…Stock overvaluation increases the chances of opportunistic acquisitions (Akbulut 2013). We expect that the bidder may prefer an investment bank advisor to add credibility to such transactions.…”

The Benefits of Overvaluation: Evidence from Mergers and Acquisitions

“…I develop a research framework that more accurately and precisely isolates and measures the impact of overvaluation for stock acquirers. I further explain and discuss why the research frameworks of Fu et al (2013) and Akbulut (2013) are underspecified and uninformative when drawing conclusions in favor or against the markettiming hypothesis of Shleifer and Vishny (2003). In Fu et al's (2013) and Akbulut's (2013) work, it is unclear whether the underperformance of overvalued stock acquirers is driven by the acquisitions effect, by the methods of payment, or by the overvaluation effect.…”

“…Thus, their approach is not suitable when offering evidence in favor or against Shleifer and Vishny's (2003) misvaluation hypothesis. Unlike Fu et al (2013) and Akbulut (2013), the design of my approach helps to account for all of the forces that the acquirers' share price is subject to and successfully isolates the effect emanating from offering overvalued equity. The long run performance of overvalued stock acquirers is subject to four different forces: the misevaluation effect and three additional ones.…”

“…Empirical evidence argues that acquisitions destroy value (Loughran and Vijh, 1997;Rau and Vermaelen, 1998) in the long run. The comparison of acquirers with nonacquirers (i.e., as in Fu et al, 2013 andAkbulut, 2013) does not consider this effect. Finally, the final force is the effect of the exploitation of overvalued equity.…”

“…I compare acquirers with acquirers. I do not compare acquirers with nonacquirers (Akbulut, 2013;Fu et al, 2013) or acquirers with failed acquirers (Savor and Lu, 2009). The long-term creation or destruction of synergies, on average, should be captured in all four subgroups.…”