Acquisitions driven by stock overvaluation: Are they good deals?

Fangjian Fu, Leming Lin and Micah S. Officer

Journal of Financial Economics, 2013, vol. 109, issue 1, 24-39

Abstract: Theory and recent evidence suggest that overvalued firms can create value for shareholders if they exploit their overvaluation by using their stock as currency to purchase less overvalued firms. We challenge this idea and show that, in practice, overvalued acquirers significantly overpay for their targets. These acquisitions do not, in turn, lead to synergy gains. Moreover, these acquisitions seem to be concentrated among acquirers with the largest governance problems. CEO compensation, not shareholder value creation, appears to be the main motive behind acquisitions by overvalued acquirers.

Keywords: Mergers and acquisitions; Stock overvaluation; Operating performance; Agency costs; CEO compensation (search for similar items in EconPapers)
JEL-codes: G14 G34 (search for similar items in EconPapers)
Date: 2013
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (102)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jfinec:v:109:y:2013:i:1:p:24-39

DOI: 10.1016/j.jfineco.2013.02.013

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