The Effect of Stock Misvaluation and Investment Opportunities on the Method of Payment in Mergers

60 Pages Posted: 1 Feb 2011 Last revised: 12 Dec 2012

Date Written: October 5, 2012

Abstract

This paper tests the effect of firms’ mispricing and investment opportunities on the method of payment in mergers. Using a new proxy for investment opportunities and a sample of 1,187 mergers completed between 1990 and 2005 among US publicly traded firms, I find that acquirers lead the decision on the method of payment, thus exploiting short-term market mispricing (in line with both the Shleifer and Vishny (2003) and Rhodes-Kropf and Viswanathan (2004) models). However, target managers believe in the quality of the merger and care about the long-term value of the merged entity’s shares (as predicted by Rhodes-Kropf and Viswanathan (2004) and contrary to Shleifer and Vishny (2003)). I also find that better investment opportunities lead to greater use of stock.

Keywords: Mergers and Acquisitions, Method of Payment, Misvaluation, Investment Opportunities

JEL Classification: G34, G14

Suggested Citation

Di Giuli, Alberta, The Effect of Stock Misvaluation and Investment Opportunities on the Method of Payment in Mergers (October 5, 2012). Available at SSRN: https://ssrn.com/abstract=1752332 or http://dx.doi.org/10.2139/ssrn.1752332

Alberta Di Giuli (Contact Author)

ESCP ( email )

Paris Campus
79, Avenue de la Republique
Paris, 75011
France

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