Overvalued Acquirers Still Prefer to Pay with Stock

Abstract

In contrast to recent criticisms, we find that acquirer overvaluation (still) leads to more stock payment in M&As as predicted by the bidder opportunism hypothesis. Employing the Stambaugh, Yu and Yuan (2015) mispricing score to identify bidder misvaluation, we show that overvaluation is one of the main drivers of the payment choice in M&As. Using an instrumental variable approach, we show that exogenous variation in acquirer mispricing significantly affects the share of stock payment, supporting a causal interpretation. Consistent with bidder opportunism, we document a long-run underperformance of overvalued stock acquirers. Finally, we show that targets more familiar with the bidder are more likely to accept overvalued equity and that bidder CEOs with financial expertise are more likely to exploit their firm’s overvaluation by paying in stock.

Keywords: Mergers and Acquisitions, Payment Method, Stock Payment, Acquirer Mispricing

JEL Classification: G34, G14