Hostname: page-component-586b7cd67f-gb8f7 Total loading time: 0 Render date: 2024-12-02T22:56:30.938Z Has data issue: false hasContentIssue false
  • English
  • Français

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:
[email protected], Fisher College of Business, Ohio State University, Columbus, OH 43210 and the National Bureau of Economic Research
Michael S. Drake
Affiliation:
[email protected], Marriott School of Management, Brigham Young University, Provo, UT 84603
Darren T. Roulstone
Affiliation:
[email protected], Fisher College of Business, Ohio State University, Columbus, OH 43210.
*
*Corresponding author: [email protected]
Get access Rights & Permissions [Opens in a new window]

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 

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

References

Andrade, G.; Mitchell, M.; and Stafford, E.. “New Evidence and Perspectives on Mergers.” Journal of Economic Perspectives, 15 (2001), 103–112.Google Scholar
Ang, J. S., and Cheng, Y.. “Direct Evidence on the Market-Driven Acquisition Theory.” Journal of Financial Research, 29 (2006), 199–216.CrossRefGoogle Scholar
Asquith, P., and Meulbroek, L.. “An Empirical Investigation of Short Interest.” Working Paper, Massachusetts Institute of Technology (1995). Google Scholar
Asquith, P.; Pathak, P. A.; and Ritter, J. R.. “Short Interest, Institutional Ownership, and Stock Returns.” Journal of Financial Economics, 78 (2005), 243–276.CrossRefGoogle Scholar
Autore, D. M.; Gehy, D.; and Jiang, D.. “Short Interest as a Signal to Issue Equity.” Working Paper, Florida State University (2014). Google Scholar
Baker, M., and Savaşoglu, S.. “Limited Arbitrage in Mergers and Acquisitions.” Journal of Financial Economics, 64 (2002), 91–116.Google Scholar
Ben-David, I., and Roulstone, D. T.. “Limits to Arbitrage and Post-Announcement Acquirer Underperformance.” Working Paper, Ohio State University (2010). Google Scholar
Bi, X. G., and Gregory, A.. “Stock Market Driven Acquisitions versus the Q Theory of Takeovers: The UK Evidence.” Journal of Business Finance & Accounting, 38 (2011), 628–656.Google Scholar
Boehmer, E.; Huszar, Z. R.; and Jordan, B. D.. “The Good News in Short Interest.” Journal of Financial Economics, 96 (2010), 80–97.Google Scholar
Boone, A. L., and Mulherin, J. H.. “How Are Firms Sold?” Journal of Finance, 62 (2007), 847–875.CrossRefGoogle Scholar
Cai, J.; Song, M. H.; and Walking, R. A.. “Anticipation, Acquisitions and Bidder Returns: Industry Shocks and the Transfer of Information across Rivals.” Review of Financial Studies, 24 (2011), 2242–2285.CrossRefGoogle Scholar
Carhart, M. M. “On Persistence in Mutual Fund Performance.” Journal of Finance, 52 (1997), 57–82.Google Scholar
Christoffersen, S.; Geczy, C.; Musto, D.; and Reed, A.. “Crossborder Dividend Taxation and the Preferences of Taxable and Nontaxable Investors: Evidence from Canada.” Journal of Financial Economics, 78 (2005), 121–144.Google Scholar
D’Avolio, G. “The Market for Borrowing Stock.” Journal of Financial Economics, 66 (2002), 271–306.Google Scholar
Dechow, P.; Hutton, A. P.; Meulbroek, L.; and Sloan, R. G.. “Short-Sellers, Fundamental Analysis, and Stock Returns.” Journal of Financial Economics, 61 (2001), 77–106.CrossRefGoogle Scholar
Desai, H.; Krishnamurthy, S.; and Venkataraman, K.. “Do Short Sellers Target Firms with Poor Earnings Quality? Evidence from Earnings Restatements.” Review of Accounting Studies, 11 (2006), 71–90.CrossRefGoogle Scholar
Desai, H.; Ramesh, K.; Thiagarajan, S. R.; and Balachandran, B. V.. “An Investigation of the Informational Role of Short Interest in the Nasdaq Market.” Journal of Finance, 57 (2002), 2263–2287.CrossRefGoogle Scholar
Diether, K., and Werner, I.. “When Constraints Bind.” Working Paper, Ohio State University (2011). Google Scholar
Dong, M.; Hirshleifer, D.; Richardson, S.; and Teoh, S. H.. “Does Investor Misvaluation Drive the Takeover Market?” Journal of Finance, 61 (2006), 725–762.CrossRefGoogle Scholar
Drake, M. S.; Rees, L.; and Swanson, E.. “Should Investors Follow the Prophets or the Bears? Evidence on the Use of Public Information by Analysts and Short Sellers.” Accounting Review, 86 (2011), 101–130.Google Scholar
Efendi, J.; Kinney, M.; and Swanson, E.. “Can Short Sellers Anticipate Accounting Restatements?” Working Paper, Texas A&M University (2006).Google Scholar
Fama, E. F., and French, K. R.. “Common Risk Factors in the Returns on Stocks and Bonds.” Journal of Financial Economics, 33 (1993), 3–56.Google Scholar
Fama, E. F., and French, K. R.. “Industry Costs of Equity.” Journal of Financial Economics, 43 (1997), 153–193.Google Scholar
Friedman, J. N. “Stock Market Driven Acquisitions: Theory and Evidence.” Working Paper, Harvard University (2006).Google Scholar
Fuller, K.; Netter, J.; and Stegemoller, M.. “What Do Returns to Acquiring Firms Tell Us? Evidence from Firms That Make Many Acquisitions.” Journal of Finance, 57 (2002), 1763–1792.CrossRefGoogle Scholar
Hanson, S. G., and Sunderam, A.. “The Growth and Limits of Arbitrage: Evidence from Short Interest.” Review of Financial Studies, 27 (2014), 1238–1286.Google Scholar
Henry, T. R., and Koski, J. L.. “Short Selling around Seasoned Equity Offerings.” Review of Financial Studies, 26 (2013), 287–322.Google Scholar
Jovanovic, B., and Rousseau, P. L.. “The Q-Theory of Mergers.” American Economic Journal: Papers and Proceedings, 92 (2002), 198–204.Google Scholar
Karpoff, J., and Lou, X.. “Short Sellers and Financial Misconduct.” Journal of Finance, 65 (2010), 1879–1913.Google Scholar
Levine, O. “Acquiring Growth.” Working Paper, University of Wisconsin–Madison (2013).Google Scholar
Loughran, T., and Vijh, A. M.. “Do Long-Term Shareholders Benefit from Corporate Acquisitions?” Journal of Finance, 52 (1997), 1765–1790.Google Scholar
Maksimovic, V.; Phillips, G.; and Yang, L.. “(Mis)valuation and Investment.” Working Paper, University of Maryland (2010). Google Scholar
Masulis, R.; Wang, G.; and Xie, F.. “Corporate Governance and Acquirer Returns.” Journal of Finance, 62 (2007), 1851–1889.Google Scholar
Mitchell, M.; Pulvino, T.; and Stafford, E.. “Price Pressure around Mergers.” Journal of Finance, 59 (2004), 31–43.Google Scholar
Mitchell, M., and Stafford, E.. “Managerial Decisions and Long-Term Stock Price Performance.” Journal of Business, 73 (2000), 287–320.Google Scholar
Moeller, S. B.; Schlingemann, F. P.; and Stulz, R. M.. “Firm Size and the Gains from Acquisitions.” Journal of Financial Economics, 73 (2004), 201–228.Google Scholar
Nagel, S. “Short Sales, Institutional Investors, and the Cross-Section of Stock Returns.” Journal of Financial Economics, 78 (2005), 277–309.Google Scholar
Pontiff, J. “Costly Arbitrage and the Myth of Idiosyncratic Risk.” Journal of Accounting and Economics, 42 (2006), 35–52.CrossRefGoogle Scholar
Rau, R., and Vermaelen, T.. “Glamour, Value, and the Post-Acquisition Performance of Acquiring Firms.” Journal of Financial Economics, 49 (1998), 223–253.Google Scholar
Rhodes-Kropf, M.; Robinson, D. T.; and Viswanathan, S.. “Valuation Waves and Merger Activity: The Empirical Evidence.” Journal of Financial Economics, 77 (2005), 561–603.Google Scholar
Rhodes-Kropf, M., and Viswanathan, S.. “Market Valuation and Merger Waves.” Journal of Finance, 59 (2004), 2685–2718.Google Scholar
Rousseau, P. L. “The Q-Theory of Mergers: International and Cross-Border Evidence.” Working Paper, Vanderbilt University (2009). Google Scholar
Servaes, H. “Tobin’s Q and the Gains from Takeovers.” Journal of Finance, 46 (1991), 409–419.Google Scholar
Shleifer, A., and Vishny, R. W.. “Stock Market Driven Acquisitions.” Journal of Financial Economics, 70 (2003), 295–312.Google Scholar
Sinha, M. “The Long-Run Performance of Mergers and Acquisitions: Risk or Mispricing?” Working Paper, Cornerstone Research (2003). Google Scholar
Thornock, J. “The Effects of Dividend Taxation on Short Selling.” Accounting Review, 88 (2013), 1833–1856.Google Scholar