Are Stock-Financed Takeovers Opportunistic?


Speaker


Abstract

We find that the probability of all-stock financed takeovers increases with measures of bidder overvaluation. However, when we instrument the bidder’s pricing error using aggregate mutual fund flows, the reverse happens: greater overvaluation reduces the all-stock financing propensity. Since shocks to aggregate fund flows are exogenous to the payment method choice -- while directly impacting bidder pricing errors -- this evidence strongly rejects the notion that all-stock financed takeovers are “market driven”. Bidders paying with stock tend to be small non-dividend paying growth companies with low leverage, and who recently made a seasoned equity offering. We also show that all-stock financing is more likely in high-tech industries, when the two firms operate in highly complementary industries, and when the target is geographically close -- factors that suggest the target is relatively informed about true bidder value. Overall, the evidence does not suggest a particular role for market mispricing in driving all-stock financed takeovers.

This event is an Erasmus Finance Seminar. The Erasmus Finance Seminar series brings prominent researchers in Finance from all over the world to Rotterdam.