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: Suggested Citation
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