Does market misvaluation drive post-acquisition underperformance in stock deals?

Hsuan-Chu Lin, Ting-Kai Chou and Jia-Chi Cheng

International Review of Economics & Finance, 2011, vol. 20, issue 4, 690-706

Abstract: There is limited direct evidence on the impact of market misvaluation on acquirer long run performance. In this paper, we hypothesize that stock prices of stock-financed acquirers would move toward their fundamental value in the long run, thus correcting the initial overvaluation. Empirical results show that more overvalued acquirers are associated with poorer post-acquisition abnormal returns. We eliminate the concern that our findings are due to either overpayment or overvaluation-driven bad acquisitions. Our results are robust to controlling for market-wide valuation, alternative methods and assumptions used to calculate abnormal returns and fundamental value, and other factors affecting acquirer returns.

Keywords: Misvaluation; Mergers; and; acquisitions; Long-run; performance; Residual; income; valuation (search for similar items in EconPapers)
Date: 2011
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Citations: View citations in EconPapers (11)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:reveco:v:20:y:2011:i:4:p:690-706

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