What is it about?
Researchers suspect that the overvaluation of equity issuing acquirers is a major cause of their subsequent post-event underperformance. Definitive conclusions regarding this overpricing hypothesis have not been possible since indicators of overpricing such as the book-to-market ratio and subsequent underperformance are open to alternative interpretations. We aim to corroborate or refute over-valuation as a driver of equity issuing acquirers’ subsequent underperformance.
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Why is it important?
The post-acquisition earnings of equity issuing acquirers disappoint more often than those of acquirers employing alternative financing methods. This relationship is confined to glamour acquirers. The ability of financing method to predict long-run post-acquisition performance is subsumed when direct measures of optimism are included in a model explaining long-run post-acquisition performance. This result is robust to controls for overpayment and other potential explanations of post-acquisition underperformance. Acquirers’ management exploit their information advantage to exchange overvalued equity for the assets of the target company in accordance with Loughran and Ritter’s (2000) behavioural timing hypothesis.
Perspectives
Our results suggest that acquirers’ management exploit their information advantage to exchange overvalued equity for the assets of the target company in accordance with Loughran and Ritter’s (2000) behavioural timing hypothesis. This essentially means that acquirer's management exploit the overvalued equity of their own companies to buy the assets of other firms using this over valued currency.
Dr Ray Donnelly
University College Cork National University of Ireland
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This page is a summary of: The acquisition puzzle and mispricing: evidence of over-optimism, International Journal of Managerial Finance, August 2014, Emerald,
DOI: 10.1108/ijmf-01-2012-0001.
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