Do Stock Mergers Create Value for Acquirers?
50 Pages Posted: 7 Feb 2006 Last revised: 21 Apr 2014
Date Written: August 20, 2008
This paper finds support for the hypothesis that overvalued firms create value for long-term shareholders by using their equity as currency. Any approach centered on abnormal returns is complicated by the fact that the most overvalued firms have the greatest incentive to engage in stock acquisitions. We solve this endogeneity problem by creating a sample of mergers that fail for exogenous reasons. We find that unsuccessful stock bidders significantly underperform successful ones. Failure to consummate is costlier for richly priced firms, and the unrealized acquirer-target combination would have earned higher returns. None of these results hold for cash bids.
Keywords: Mergers, Acquisitions, Market Efficiency, Long-run Returns
JEL Classification: G12, G14, G34
Suggested Citation: Suggested Citation