Acquirer Valuation and Acquisition Decisions: Identifying Mispricing Using Short Interest
Charles A. Dice Center Working Paper No. 2010-11
62 Pages Posted: 16 Mar 2010 Last revised: 3 May 2013
Date Written: April 24, 2013
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: Suggested Citation