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.
All Science Journal Classification (ASJC) codes
- Economics and Econometrics