Do Stock Mergers Create Value for Acquirers? Jessie Mu 17720995

CONTENT 01 ABSTRACT 02 Data & Methodology & Variable Definitions 03 Summary Statistics for Stock-Financed Bids 04 Acquirer Valuation and Post-event Performance &

05 Conclusion CONTENT

1 PART ONE ABSTRACT

overvalued firms create value for long-term shareholders by using their equity as currency. Any approach centered on abnormal returns is complicated by the fact that the most overvalued firms have the greatest incentive to engage in stock acquisitions. We find that unsuccessful stock bidders significantly underperform successful ones. Failure to consummate is costlier for richly priced firms, and the unrealized acquirer-target combination would have earned higher returns. None of these results hold for cash bids. .

2 PART TWO Data & Methodology & Variable Definitions

01 02 05 03 4 Sample Construction & methodology Variable Definitions . .   The main goal of this paper is to determine whether stock-financed bids create value for the acquirer’s long-term shareholders Consequently, on average acquirers will be more overvalued than their matched firms To avoid these problems with estimating fundamental value, we opt for a different methodology. : 1. One perspective is that the prospective acquirer was merely unlucky in choosing an appropriate target. 2. The other perspective on these deals, however, might caution against their inclusion in the analysis. Variable Definitions R it − Rtf = αi + βiRtmar − Rtf + γ iSMBt + δiHMLt, 01 02 05 03 4

3 PART THREE Summary Statistics for Stock-Financed Bids

Summary Statistics summary statistics for stock- and cash-financed merger bids, respectively.Acquirers have lower book-to-market ratios than targets, and this difference appears much more pronounced for stock deals. Stock bidders are also larger, engage in bigger transactions, and enjoy higher returns .

4 PART THREE Acquirer Valuation and Post-event Performance

01 Post-Announcement Performance of Successful and Failed Acquirer The relative underperformance of failed stock acquirers indicates that stock acquisitions benefit long-term shareholders. It thus supports the markettiming theory of acquisitions. Failed cash acquirers exhibit no underperformance compared to successful ones, As with our analysis of buy-and-hold returns, the impact of failure to close the deal is different depending on the mode of payment, which is exactly what the market-timing theory predicts.

Acquirer Valuation and Post-event Performance 02 Acquirer Valuation and Post-event Performance The disparity between value and glamor stock bidders should be especially large for failed deals, where the acquiring firm did not succeed in issuing new stock and thus did not manage to dilute the impact of a potential future revaluation of its assets by the market.

1.Value and charm firm classification. 03 Stock Acquirer Announcement and Long-Term Buy-and-Hold Abnormal Returns: Value versus Glamor 1.Value and charm firm classification. 2.base in relation between valuation and post-event returns. Glamor acquirers are still all more richly valued than value acquirers.

05 conclusion The market-timing theory of acquisitions predicts that stock-financed mergers benefit the acquiring firm’s long-term shareholders by converting overvalued equity into (less overvalued) hard assets. it is precisely the most overvalued firms that have the greatest incentive to engage in stock acquisitions. This positive relation between a firm’s valuation and its propensity to make stock bids。

05 conclusion We find that unsuccessful stock bidders underperform successful ones in an economically meaningful and statistically significant way. This underperformance increases with the length of the holding period。 Glamor stock bidders perform worse than value stock bidders, and failure to consummate is more costly for richly priced firms, indicating that valuation does play a role in post-announcement performance

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