A New Misvaluation Perspective on Why Cash Is King in M&As

37 Pages Posted: 7 Mar 2007 Last revised: 27 Nov 2017

See all articles by Jerry Coakley

Jerry Coakley

University of Essex - Essex Business School

Lei Fu

University of Essex

Hardy M. Thomas

University of Essex

Date Written: 2007

Abstract

We propose and test a new misvaluation approach to mergers and acquisitions (M&As) using a sample of 302 UK bidders and targets 1986-2002. Our model assumes that managers have insider information on book values while investors only have publicly available information. We find that bidders are overvalued relative to targets. Strikingly, bidders in cash mergers appear more overvalued to managers than do bidders in stock mergers in direct opposition to what is predicted by misvaluation theories. Since mergers directly benefit both bidder and target managers, they mutually agree on cash payment to ensure a friendly deal and thus maximize its chances of success by placating the target investors. This explains the puzzle of why bidders pay cash instead of their overvalued stock to finance the majority of UK M&As.

Keywords: Market-to-book, means of payment, manager-perceived misvaluation

JEL Classification: G14, G34

Suggested Citation

Coakley, Jerry and Fu, Lei and Thomas, Hardy Mathew, A New Misvaluation Perspective on Why Cash Is King in M&As (2007). Available at SSRN: https://ssrn.com/abstract=968018 or http://dx.doi.org/10.2139/ssrn.968018

Jerry Coakley (Contact Author)

University of Essex - Essex Business School ( email )

Wivenhoe Park
Colchester, CO4 3SQ
United Kingdom
+44 1206 872455 (Phone)
+44 1206 873429 (Fax)

HOME PAGE: http://www.essex.ac.uk/afm/staff/coakley.shtm

Lei Fu

University of Essex ( email )

Wivenhoe Park
Colchester CO4 3SQ
United Kingdom
0044 7760296488 (Phone)
0044 1206 873429 (Fax)

HOME PAGE: http://www.essex.ac.uk/afm/research/lei_fu.shtm

Hardy Mathew Thomas

University of Essex ( email )

Wivenhoe Park
Colchester, CO4 3SQ
United Kingdom
44 01 206-873415 (Phone)
44 1206-873429 (Fax)

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