The Benefits of Overvaluation: Evidence from Mergers and Acquisitions

Theoretical and empirical evidence debates whether acquirers can exploit their overvalued equity and create value by purchasing less overvalued or undervalued target firms. Shleifer and Vishny (2003) and Savor and Lu (2009) argue in favor of this, while Fu, Lin, and Officer (2013) and Akbulut (2013) provide evidence against. I revisit this issue and develop a quasi-experimental design. The misvaluation effect for stock acquirers that are more overvalued than their targets is isolated and measured. My findings offer direct evidence in favor of the Shleifer and Vishny (2003) market-timing hypothesis.