The acquisition puzzle and mispricing: evidence of over-optimism

Donnelly, Ray; Hajbaba, Amir

doi:10.1108/ijmf-01-2012-0001

Cited by 7 publications

(4 citation statements)

References 57 publications

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“…An anticipated short-term boost to accounting performance may also incentivize myopic acquisitiveness (Block, 2002). Acquirers' executives may become overoptimistic (Donnelly and Hajbaba, 2014) with respect to the projected synergies ensuing from acquisitions. Valuation uncertainty is likely to fuel erroneous expectations, while managerial overconfidence may further entrench executives' favorable view of the upcoming transactions.…”

Section: Theoretical Framework and Literature Reviewmentioning

confidence: 99%

Does valuation uncertainty benefit acquirers or targets?

Wnuczak

Osiichuk

2023

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PurposeWhile the existing studies largely suggest that valuation uncertainty benefits acquirers, who apply discounts to targets' value attributable to information asymmetry, the authors argue that the opposite may be the case.Design/methodology/approachThrough multivariate econometric analysis of transaction data, the authors establish the link between the degree of valuation uncertainty measured by targets' track of public listing and acquisition premia. The authors use text-mining tools to measure acquirer–target similarity and control for its role in intermediating the posited empirical relationships.FindingsHaving analyzed 618 acquisitions involving listed targets from China, the authors find that acquirers pay higher valuation premia for the more recently listed and relatively younger companies than for those with a longer history since floatation. Similar patterns apply to valuation multiples. Higher valuations are partially attributable to premia for control, as acquirers are likelier to buy a majority stake in the recently listed firms, especially if the latter are similar to them. Such transactions take less time to complete and involve a transfer of larger share blocks despite the higher degree of information asymmetry and a frequent lack of targets' operational profitability. The authors also observe a significant premium for target–acquirer similarity: acquirers appear to rush deal completion due to possible overestimation of targets' potential and familiarity bias.Originality/valueThe authors show that acquisition premia may be driven by acquirers' proclivity to place risky investment bets on the growth potential of opaque targets. This pattern may partially explain frequent failures of mergers and acquisitions (M&A).

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Section: Theoretical Framework and Literature Reviewmentioning

confidence: 99%

Does valuation uncertainty benefit acquirers or targets?

Wnuczak

Osiichuk

2023

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“…In the literature, glamour acquirers are a group of firms identified as likely underperformers in the years post-acquisition (Donnelly and Hajbaba, 2014;Lakonishok et al, 1994;Rau and Vermaelen, 1998). The latter authors report that, glamour acquirers generate negative abnormal returns following an acquisition.…”

Section: Literature Review About Glamorous Manda Performance and Motivmentioning

confidence: 99%

Glamorous Acquisitions in Telecommunications after the Market Liberalisation: Success or Failure?

Navío-Marco¹,

Serrano-Calle²,

García³

2020

JBAFP

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The academic literature indicates that “glamour” influences the investor’s behaviour. This article analyses the performance and value creation of the glamorous operations of mergers and acquisitions (M&A) in the telecommunications sector, trying to understand if these operations are conducive to stockholder wealth maximization. To conduct this analysis, the telecommunications M&A that occurred in the convulsed period of the internet bubble were counted as samples (1995–2010). The research concludes that glamour tends to be opposite to value creation in the long run: the glamour firms show significant value destruction and worse performance than non-glamour firms. Certain acquirers’ characteristics, such as size, are determinant in the glamour behaviour. This paper combats the shortage of research of a quantitative sectoral nature on telecommunications M&As, when leading international companies like Vodafone, Cable and Wireless, France Telecom or Telecom Italia are very active in this kind of operations.

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“…Jensen and Ruback (1983) find that if the management pursues personal interests and deviates from the goal of maximizing shareholder value, resulting in a decline in operation performance, shareholders will no longer support and trust the management, then the company is easy to become a trading partner in the control market, and inefficient management will also be taken over after the transfer of the company’ s control (Biggerstaff et al , 2020). Easterwood (1998) indicates that the management will transmit the signal of efficient management through upward earnings management to reduce the risk of being taken over after the transfer of control (Donnelly and Hajbaba, 2014). Ben-Amar and missonier-Piera (2008) believe that the agency problem in the transfer of control will become more prominent, the management may use its own information asymmetry advantage to carry out opportunistic earnings management, to help the buyer reduce acquisition cost through downward earnings management before the transfer of control and beautify the efficiency of control transfer through upward earnings management after the transfer of control.…”

Section: Introductionmentioning

confidence: 99%

Control transfer and old shareholder governance of the “seller”: who hinders the management retention?

Wang

Dai

et al. 2022

NBRI

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Purpose Under the background of China’s initial public offering approval system, the buyer may acquire the listed company more for the purpose of obtaining listing qualification, and the operation performance of target company may not be the main motivation for evaluating and replacing the management, which may breed the self-interest motivation of the management to collude with the buyer to lower the price to continue to stay in office. Further, if the management and the buyer collude successfully and achieve retention by reducing the transfer price of control and sacrificing the interests of the “seller,” it is worth discussing whether the old shareholders of the “seller” existing in the firm can prevent the self-interest management from continuing to remain in office through effective corporate governance mechanism. Design/methodology/approach Taking A-share listed companies with control transfer from 2000 to 2017 as sample, this paper investigates the strategy, path and retention consequence of the target company’s market selected top management who collude with the new controlling shareholder to avoid the risk of being taken over by control transfer. Findings This research explores that negative earnings management behavior may reduce the real premium of control transfer after deducting the “shell value.” The lower the real premium of control transfer after deducting the “shell value,” the higher the probability of management retention after control transfer. This paper also reveals that the real premium of control transfer after deducting the “shell value” plays complete mediation role between the negative earnings management behavior of the management and their own retention. The mediation effect of “collusion and price reduction” in the control transfer will be inversely moderated by the governance mechanism of noncontrolling shareholders including the old shareholders of the seller. Originality/value This paper not only constitutes a supplement to the existing literature but also provides empirical evidence for standardizing the control transfer behavior of listed companies, and making good use of the old shareholders of the seller to improve corporate governance and alleviate agency conflict after control transfer.

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The acquisition puzzle and mispricing: evidence of over-optimism

Cited by 7 publications

References 57 publications

Does valuation uncertainty benefit acquirers or targets?

Does valuation uncertainty benefit acquirers or targets?

Glamorous Acquisitions in Telecommunications after the Market Liberalisation: Success or Failure?

Control transfer and old shareholder governance of the “seller”: who hinders the management retention?

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