The effect of stock misvaluation and investment opportunities on the method of payment in mergers

Alberta Di Giuli

Journal of Corporate Finance, 2013, vol. 21, issue C, 196-215

Abstract: This paper tests the effect of firms' mispricing and investment opportunities on the method of payment in mergers. Using a new proxy for investment opportunities and a sample of 1187 mergers completed between 1990 and 2005 among US publicly traded firms, I find that acquirers lead the decision on the method of payment, thus exploiting short-term market mispricing (in line with both the Rhodes-Kropf and Viswanathan, 2004 and Shleifer and Vishny, 2003 models). However, target managers believe in the quality of the merger and care about the long-term value of the merged entity's shares (as predicted by Rhodes-Kropf and Viswanathan, 2004 and contrary to Shleifer and Vishny, 2003). I also find that better investment opportunities lead to greater use of stock.

Keywords: Mergers and acquisitions; Method of payment; Misvaluation; Investment opportunities (search for similar items in EconPapers)
JEL-codes: G14 G34 (search for similar items in EconPapers)
Date: 2013
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Citations: View citations in EconPapers (6)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:corfin:v:21:y:2013:i:c:p:196-215

DOI: 10.1016/j.jcorpfin.2013.02.002

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