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Acquirer Valuation and Acquisition Decisions: Identifying Mispricing Using Short Interest

Published online by Cambridge University Press:  08 June 2015

Itzhak Ben-David ,
Michael S. Drake  and
Darren T. Roulstone
Itzhak Ben-David*
Affiliation:
bendavid@fisher.osu.edu, Fisher College of Business, Ohio State University, Columbus, OH 43210 and the National Bureau of Economic Research
Michael S. Drake
Affiliation:
mikedrake@byu.edu, Marriott School of Management, Brigham Young University, Provo, UT 84603
Darren T. Roulstone
Affiliation:
roulstone.1@osu.edu, Fisher College of Business, Ohio State University, Columbus, OH 43210.
*
*Corresponding author: bendavid@fisher.osu.edu
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Abstract

We use short interest as an investor-based measure of over- or undervaluation that distinguishes between the misvaluation and Q-theories of mergers. Using this measure, we find that misvaluation is a strong determinant of merger decision-making. Firms in the top quintile of short interest are 54% more likely to engage in stock acquisitions and 22% less likely to engage in cash acquisitions. Stock (but not cash) acquirers have higher short interest than their targets. Overall, our results suggest that the previously documented underperformance of stock acquirers and the overperformance of cash acquirers can be explained by misvaluation, as captured by short interest.

Type
Research Articles
Information
Journal of Financial and Quantitative Analysis , Volume 50 , Issue 1-2 , April 2015 , pp. 1 - 32
Copyright
Copyright © Michael G. Foster School of Business, University of Washington 2015 

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