Acquisitions Driven by Stock Overvaluation: Are They Good Deals?

44 Pages Posted: 4 Feb 2009 Last revised: 29 Sep 2014

See all articles by Fangjian Fu

Fangjian Fu

Singapore Management University - Lee Kong Chian School of Business

Leming Lin

University of Pittsburgh - Katz Graduate School of Business

Micah S. Officer

Loyola Marymount University - Department of Finance and Computer Information Systems

Date Written: November 1, 2012

Abstract

Theory and recent evidence suggest that overvalued firms can create value for shareholders if they exploit their overvaluation by using their stock as currency to purchase less overvalued firms. We challenge this idea and show that, in practice, overvalued acquirers significantly overpay for their target firms; these acquisitions do not, in turn, lead to synergy gains. Moreover, these acquisitions seem to be concentrated among acquirers with the largest governance problems. CEO compensation, not shareholder value creation, appears to be the main motive behind acquisitions by overvalued acquirers.

Keywords: Mergers and acquisitions, Stock overvaluation, Operating performance, Agency costs, CEO compensation

JEL Classification: G34, G14

Suggested Citation

Fu, Fangjian and Lin, Leming and Officer, Micah S., Acquisitions Driven by Stock Overvaluation: Are They Good Deals? (November 1, 2012). Journal of Financial Economics (JFE), 2013, 109, 24-39. Available at SSRN: https://ssrn.com/abstract=1328115 or http://dx.doi.org/10.2139/ssrn.1328115

Fangjian Fu (Contact Author)

Singapore Management University - Lee Kong Chian School of Business ( email )

50 Stamford Road
Singapore, 178899
Singapore

Leming Lin

University of Pittsburgh - Katz Graduate School of Business ( email )

346 Mervis Hall
University of Pittsburgh
Pittsburgh, PA 15260
United States

Micah S. Officer

Loyola Marymount University - Department of Finance and Computer Information Systems ( email )

Los Angeles, CA 90045
United States

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