Acquisitions driven by stock overvaluation: Are they good deals?

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 t...

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Bibliographic Details
Published in:Journal of financial economics 2013-07, Vol.109 (1), p.24-39
Main Authors: Fu, Fangjian, Lin, Leming, Officer, Micah S.
Format: Article
Language:English
Subjects:
Acquisitions
Acquisitions & mergers
Agency costs
Business valuation
CEO compensation
Chief executive officers
Enterprises
Executive compensation
Governance
Mergers and acquisitions
Operating performance
Shareholders wealth
Stock overvaluation
Stockholders
Stocks
Studies
Valuation
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Summary: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.
ISSN:0304-405X
1879-2774
DOI:10.1016/j.jfineco.2013.02.013