The Valuation Effects of Investor Attention in Stock-Financed Acquisitions

Abstract

Limited investor attention allows overvalued companies to engage in stock-financed acquisitions of listed target firms without experiencing significant reductions in existing valuations. Our robust findings show that overvalued stock-paying acquirers that are subject to limited investor attention do not experience significant announcement period wealth losses. However, the overvaluation of these acquirers is corrected in the post-announcement period. By contrast, the overvalued acquirers that receive high investor attention and use stock as the payment method in their listed target acquisitions experience negative announcement period abnormal returns. The widely documented evidence that stock-financed acquisitions are associated with significant announcement period wealth losses is primarily driven by deals in which the acquirers are subject to high investor attention.

Keywords: Investor attention, Corporate takeovers, Payment method, Acquirer abnormal returns

JEL Classification: G34