Are Stock-for-Stock Acquirers of Unlisted Targets Really Less Overvalued?
Financial Management (Forthcoming)
Posted: 2 Jul 2012 Last revised: 6 Jul 2012
Date Written: July 1, 2012
Extant studies on the market reaction to acquisition announcements often assume that targets’ private ownership mitigates acquirers’ incentives and opportunities to finance acquisitions with inflated stocks. This view is supported by the observation that, although the average stock-for-stock acquirer’s merger announcement return is negative when the target is listed, it is positive when the target is unlisted. Consistent with this observation, extant studies suggest that the adverse signal associated with the use of stock as currency is mitigated when the target is unlisted and that, while stock-for-stock acquirers of listed targets are generally overvalued, stock-for-stock acquirers of unlisted targets are not.
I argue that targets’ unlisted status could actually increase acquirers’ incentives and opportunities to finance acquisitions with inflated stocks. Accordingly, based on an analysis of stock-for-stock acquirers’ stock performance, abnormal accruals, net operating assets, and insider trading, I show that, not only are acquirers of unlisted targets generally overvalued, but they tend to be even more overvalued than acquirers of listed targets. I also show that the acquisition announcement abnormal trading volume is substantially smaller for acquirers of unlisted targets than for acquirers of listed targets, which is consistent with a relative delay in the correction of the overvaluation of acquirers of unlisted targets.
Keywords: M&A, Acquirer performance, Overvaluation, Target listing status, Insider trading
JEL Classification: G14, G34
Suggested Citation: Suggested Citation