Overinvestment and Stock Price Crashes: Evidence from Mergers and Acquisitions

43 Pages Posted: 23 Mar 2021

See all articles by Panayiotis C. Andreou

Panayiotis C. Andreou

Cyprus University of Technology

Konstantinos Bozos

Independent

Evridiki Panayi

University of Leeds - Faculty of Business

Date Written: March 22, 2021

Abstract

A sizeable amount of empirical research attributes stock price crashes to agency reasons, predominantly on managerial bad news hoarding behaviour manifested through the financial reporting opacity channel. Admittedly, another prominent agency-based explanation, namely the overinvestment channel, remains largely unexplored. Using a sample of 68,735 firm-year observations―with 8,096 firm-year observations featuring completed M&A deals―of US-listed firms from 1990 to 2018, this study documents a strong positive relationship between past M&As (over)investment activity and future stock price crashes. This positive overinvestment-crash risk relationship is more pronounced when firms face strong product market competition. The relationship appears to be driven by M&A deals that exhibit negative abnormal returns on their announcement. More importantly, this study further demonstrates that stock price crashes triggered by the overinvestment channel have a significant negative impact on the firm’s future operating profitability.

Keywords: firm-specific stock price crashes, bad news hoarding, agency theory, stock price crash channels, overinvestment, merger and acquisitions

JEL Classification: G13, G34

Suggested Citation

Andreou, Panayiotis C. and Bozos, Konstantinos and Panayi, Evridiki, Overinvestment and Stock Price Crashes: Evidence from Mergers and Acquisitions (March 22, 2021). Available at SSRN: https://ssrn.com/abstract=3809872 or http://dx.doi.org/10.2139/ssrn.3809872

Panayiotis C. Andreou (Contact Author)

Cyprus University of Technology ( email )

School Of Management and Economics
P.O. Box 50329
Lemesos, 3036
Cyprus

HOME PAGE: http://www.pandreou.com

Konstantinos Bozos

Independent

Evridiki Panayi

University of Leeds - Faculty of Business

Leeds LS2 9JT
United Kingdom

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