Stock Market Driven Acquisitions Versus the Q Theory of Takeovers: The UK Evidence

Abstract

Using a sample of UK mergers and acquisitions from 1985–2004, we show that equity over‐valuation appears to play an important role in the determination of financing method. Our results are broadly consistent with those theories based upon market over‐valuation driving mergers and their financing, rather than a Q-theory explanation. In some contrast to the US results of Dong et al. (2006) we find that proxies for over-valuation appear to be the more persuasive explanation for acquisition financing behaviour in the UK. Given the evidence in favour of valuation effects, we argue that a treatment effects model is necessary in investigating the long-run performance of acquirers. Taken together with results from a univariate analysis, such a model reveals some modest support for the Shleifer and Vishny (2003) hypothesis.