Acquirer Valuation and Acquisition Decisions: Identifying Mispricing Using Short Interest

62 Pages Posted: 16 Mar 2010 Last revised: 3 May 2013

Itzhak Ben-David

Ohio State University - Fisher College of Business, Finance Department; National Bureau of Economic Research (NBER)

Michael S. Drake

Brigham Young University - Marriott School

Darren T. Roulstone

Ohio State University (OSU) - Fisher College of Business

Date Written: April 24, 2013

Abstract

We use short interest as an investor-based measure of over/undervaluation that distinguishes between the misvaluation and Q-theories of mergers. Using this measure, we find that misvaluation is a strong determinant of merger decision making. Firms in the top quintile of short interest are 54% more likely to engage in stock acquisitions and 22% less likely to engage in cash acquisitions. Stock (but not cash) acquirers have higher short interest than their targets. Overall, our results suggest that the previously documented underperformance of stock acquirers and the overperformance of cash acquirers can be explained by misvaluation, as captured by short interest.

Keywords: Mergers, Acquisitions, Short-Selling, Short, Value Destruction, Overvaluation, Managers, Announcement, Merger Announcement, Acquirer, Target, Event Study, Stock Mergers, Mixed Mergers, Cash Mergers, Method of Payment, Public/Private Targets, Stock Market Driven Acquisitions, Merger Arbitrage

JEL Classification: G14, G17, G34

Suggested Citation

Ben-David, Itzhak and Drake, Michael S. and Roulstone, Darren T., Acquirer Valuation and Acquisition Decisions: Identifying Mispricing Using Short Interest (April 24, 2013). Journal of Financial and Quantitative Analysis (JFQA), Forthcoming; Fisher College of Business Working Paper No. 2010-03-011; Charles A. Dice Center Working Paper No. 2010-11. Available at SSRN: https://ssrn.com/abstract=1572686 or http://dx.doi.org/10.2139/ssrn.1572686

Itzhak Ben-David (Contact Author)

Ohio State University - Fisher College of Business, Finance Department ( email )

2100 Neil Avenue
Fisher 700D
Columbus, OH 43210-1144
United States
773 988 1353 (Phone)

HOME PAGE: http://fisher.osu.edu/fin/faculty/Ben-David/index.htm

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

HOME PAGE: http://fisher.osu.edu/fin/faculty/Ben-David/

Michael S. Drake

Brigham Young University - Marriott School ( email )

United States

Darren T. Roulstone

Ohio State University (OSU) - Fisher College of Business ( email )

2100 Neil Avenue
Columbus, OH 43210-1144
United States

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