Valuation waves and merger activity: The empirical evidence

Journal Article (Journal Article)

To test recent theories suggesting that valuation errors affect merger activity, we develop a decomposition that breaks the market-to-book ratio (M/B) into three components: the firm-specific pricing deviation from short-run industry pricing; sector-wide, short-run deviations from firms' long-run pricing; and long-run pricing to book. We find strong support for recent theories by Rhodes-Kropf and Viswanathan [2004. Market valuation and merger waves. Journal of Finance, forthcoming] and Shleifer and Vishny [2003. Stock market driven acquisitions. Journal of Financial Economics 70, 295-311], which predict that misvaluation drives mergers. So much of the behavior of M/B is driven by firm-specific deviations from short-run industry pricing, that long-run components of M/B run counter to the conventional wisdom: Low long-run value to book firms buy high long-run value-to-book firms. Misvaluation affects who buys whom, as well as method of payment, and combines with neoclassical explanations to explain aggregate merger activity. © 2005 Elsevier B.V. All rights reserved.

Full Text

Duke Authors

Cited Authors

  • Rhodes-Kropf, M; Robinson, DT; Viswanathan, S

Published Date

  • September 1, 2005

Published In

Volume / Issue

  • 77 / 3

Start / End Page

  • 561 - 603

International Standard Serial Number (ISSN)

  • 0304-405X

Digital Object Identifier (DOI)

  • 10.1016/j.jfineco.2004.06.015

Citation Source

  • Scopus