Does Investor Misvaluation Drive the Takeover Market?
Dice Center Working Paper No. 2003-7
44 Pages Posted: 1 May 2003 Last revised: 13 Dec 2008
Date Written: September 28, 2003
This paper tests the hypothesis that irrational market misvaluation affects firms' takeover behavior. We employ two contemporaneous proxies for market misvaluation, pre-takeover book/price ratios and pre-takeover ratios of residual income model value to price. Misvaluation of bidders and targets influences the means of payment chosen, the mode of acquisition, the premia paid, target hostility to the offer, the likelihood of offer success, and bidder and target announcement period stock returns. The evidence is broadly supportive of the misvaluation hypothesis.
Keywords: takeovers, misvaluation, market efficiency, behavioral finance
JEL Classification: G34, G14, G31
Suggested Citation: Suggested Citation