Stock liquidity, empire building, and valuation

Sris Chatterjee, Iftekhar Hasan, Kose John and An Yan

Journal of Corporate Finance, 2021, vol. 70, issue C

Abstract: We conjecture that high stock liquidity negatively affects firm valuation by inducing inefficient investment. Using takeovers of public targets to study the empire-building motive, we find that a liquid firm is more likely than an illiquid firm to acquire a public firm. Such a takeover by a bidder with higher stock liquidity destroys bidder value to a larger degree. These patterns occur in both stock and cash acquisitions and hold after we use decimalization of tick size as a quasi-exogenous shock to stock liquidity. Finally, we show that financial constraints and corporate governance play important roles in the effects of stock liquidity on empire building in mergers and acquisitions.

Keywords: Stock liquidity; Empire building; Mergers and acquisitions (search for similar items in EconPapers)
JEL-codes: G14 G32 G34 (search for similar items in EconPapers)
Date: 2021
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (4)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:corfin:v:70:y:2021:i:c:s0929119921001735

DOI: 10.1016/j.jcorpfin.2021.102051

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