Overpayments in Acquisitions, Preannouncement Insider Trading, and Executive Compensation

Abstract

Casual observations suggest that bidder managers sometimes pay more than the economic value of target in mergers and acquisitions. This paper provides two empirical findings associated with overpayments in acquisitions among publicly traded U.S. firms during the period of 2003-2011 using the purchase price allocation data under ASC 804 (SFAS 141). First, we document that bidder managers exploit their information advantage about the pricing implications of overpaid acquisitions by increasing their stock sales on their personal accounts above normal sales level prior to the public announcement of those acquisitions. Second, we document that bidder managers pay more than the economic value of targets not due to managerial hubris or executive compensation but to strategic reasons such as negative externality or supply chain management.

Keywords: Negative externality, Residual goodwill, Mergers and acquisitions, Insider trading, Executive compensation

JEL Classification: G32, G34, M41