Does Overvaluation Lead to Bad Mergers?
This study tests overvaluation as an explanation for merger and acquisition activity by examining whether insider trading patterns of acquiring firm around acquisition announcements are related to long-term post-acquisition performance, and provides evidence on the consequences of acquisitions motivated by overvaluation. My findings show that there is a sharp contrast in the behavior of insiders from my earlier sample period (1986-1996) and the later “hot market period (1997-2000). For the hot market period, there is a dramatic peak in the average number of shares sold by top insiders of acquiring firms in the month before the acquisition announcement date, followed by another sharp spike in sales when the deal approaches completion. These large increases in insider selling around the acquisition announcement are driven by firms whose insiders are “pure sellers. This behavior is not observed for the earlier time period. For acquisitions occurring during the “hot market period, acquirers whose insiders are “pure sellers significantly underperform their control firms three years following the acquisitions, while acquirers whose insiders are “pure buyers do not. Moreover, only “pure seller acquirers experience deterioration in abnormal operating performance from the year before to three years after the acquisition, implying that these mergers are “bad mergers. Overall, the evidence thatpure sellers are associated with worse long-term stock performance even after controlling for the “bad merger effect indicates that overvaluation is an important motive for acquisitions. The evidence also suggests that the agency costs of overvalued equity described by Jensen (2005) could be an important explanation for wealth destroying deals in the late 1990s.
Overvaluation bad merger insider trading long-term stock performance.
Weihong Song
University of Cincinnati
国际会议
西安
英文
2006-07-17（万方平台首次上网日期，不代表论文的发表时间）