Overpayments in Acquisitions, Preannouncement Insider Trading, and Executive Compensation

35 Pages Posted: 2 Feb 2014 Last revised: 5 May 2015

See all articles by Mehmet Akbulut

Mehmet Akbulut

California State University, Fullerton - Department of Finance

Cheol Lee

Wayne State University

Steve C. Lim

Texas Christian University - M.J. Neeley School of Business

Date Written: April 3, 2015

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

Suggested Citation

Akbulut, Mehmet E. and Lee, Cheol and Lim, Steve, Overpayments in Acquisitions, Preannouncement Insider Trading, and Executive Compensation (April 3, 2015). Available at SSRN: https://ssrn.com/abstract=2389533 or http://dx.doi.org/10.2139/ssrn.2389533

Mehmet E. Akbulut

California State University, Fullerton - Department of Finance ( email )

PO Box 34080
Fullerton, CA 92834-9480
United States
657-278-8259 (Phone)

Cheol Lee

Wayne State University ( email )

United States
313-577-2242 (Phone)

Steve Lim (Contact Author)

Texas Christian University - M.J. Neeley School of Business ( email )

2900 Lubbock Street
Fort Worth, TX 76129
United States
817-257-7536 (Phone)

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