Inefficiencies and Externalities from Opportunistic Acquirers

56 Pages Posted: 15 Jun 2016 Last revised: 7 Oct 2018

See all articles by Di Li

Di Li

Peking University - HSBC School of Business

Lucian A. Taylor

University of Pennsylvania - The Wharton School

Wenyu Wang

Indiana University - Kelley School of Business - Department of Finance

Date Written: November 30, 2017

Abstract

If opportunistic acquirers can buy targets using overvalued shares, then there is an inefficiency in the merger and acquisition (M&A) market: The most overvalued rather than the highest-synergy bidder may buy the target. We quantify this inefficiency using a structural estimation approach. We find that the M&A market allocates resources efficiently on average. Opportunistic bidders crowd out high-synergy bidders in only 7% of transactions, resulting in an average synergy loss equal to 9% of the target's value in these inefficient deals. The implied average loss across all deals is 0.63%. Although the inefficiency is small on average, it is large for certain deals, and it is larger when misvaluation is more likely. Even when opportunistic bidders lose the contest, they drive up prices, imposing a large negative externality on the winning synergistic bidders.

Keywords: Mergers and acquisitions, structural estimation, misvaluation, inefficiency, externality

JEL Classification: G14, G34

Suggested Citation

Li, Di and Taylor, Lucian A. and Wang, Wenyu, Inefficiencies and Externalities from Opportunistic Acquirers (November 30, 2017). Journal of Financial Economics (JFE), 130 (2): 265-290. doi: 10.1016/j.jfineco.2018.07.005. Available at SSRN: https://ssrn.com/abstract=2795152 or http://dx.doi.org/10.2139/ssrn.2795152

Di Li

Peking University - HSBC School of Business ( email )

Peking University HSBC Business School, Office 615
University Town
Shenzhen, Guangdong 518055
China
+86 755-2603-1509 (Phone)

Lucian A. Taylor (Contact Author)

University of Pennsylvania - The Wharton School ( email )

3641 Locust Walk
Philadelphia, PA 19104-6365
United States

HOME PAGE: http://finance.wharton.upenn.edu/~luket/

Wenyu Wang

Indiana University - Kelley School of Business - Department of Finance ( email )

1309 E. 10th St.
Bloomington, IN 47405
United States

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