Direct Evidence on the Market-Driven Acquisitions Theory

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Abstract
We provide direct empirical evidence that stocks' overvaluation is an important motive for firms to make acquisitions with their stocks, supporting the market driven acquisition theory (Shleifer and Vishny, 2002). Overvaluation increases the probability of firms becoming acquirers and the probability of using their own stocks as the medium of exchange. Once overvaluations of the combined firms are taken into account, the merged firms do not fare worse than their matches. Compared to their matches before the merger announcement, the original acquirers' shareholders do not lose; instead long-term target shareholders are the losers if they do not exit around the merger dates.