Do Stock Mergers Create Value for Acquirers?

Abstract

This paper finds support for the hypothesis that overvalued firms create value for long-term shareholders by using their equity as currency. Any approach centered on abnormal returns is complicated by the fact that the most overvalued firms have the greatest incentive to engage in stock acquisitions. We solve this endogeneity problem by creating a sample of mergers that fail for exogenous reasons. We find that unsuccessful stock bidders significantly underperform successful ones. Failure to consummate is costlier for richly priced firms, and the unrealized acquirer-target combination would have earned higher returns. None of these results hold for cash bids.

Are Stock-Financed Takeovers Opportunistic?

“…The methods of estimating a benchmark model for the true bidder value, e.g. using the observed valuation ratios of comparable non-merging firms (Fu, Lin, and Officer, 2013), or inferring counterfactual bidder stand-alone values from failed bids (Savor, 2006), do not meet this challenge. What is needed is an instrument for changes in market pricing that is exogenous to the latent bidder fundamental characteristics driving the takeover decision.…”

Cash Acquirers: Free Cash Flow, Shareholder Monitoring, and Shareholder Returns

“…These hypotheses explain the poor performance of equity-financing acquirers not in terms of poor investment decisions, but in terms of a rational management exploiting the purchasing power of the over-valued equity of their companies. Evidence in support of the Shleifer and Vishny (SV) hypothesis has been found in both the US (Ang and Cheng, 2006;Dong, Hirshleifer, Richardson and Teoh, 2006;Savor and Lu, 2009) and in the UK (Bi and . The announcement period evidence in Draper and Paudyal (2008) also provides some support for this hypothesis.…”

Investment Opportunity Sets of Real Assets: An International Empirical Study Based on Ownership Types

“…8 Independent variables are created to capture deal characteristics, target nation economy size, and institutional characteristics of target nations that may be related to government acquirers' opportunity set. These factors have been found to be significantly related to both nongovernment deals (Savor and Lu, 2009, Ahearn et al, 2012, Erel, et al, 2012 and SWFs (Karolyi and Liao, 2010, Knill, et al 2012a,b, Johan et al, 2013.Empirically, this becomes:…”