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Buy Smart, Time Smart: Are Takeovers Driven by Growth Opportunities or Mispricing?
Author(s) -
Van Bekkum Sjoerd,
Smit Han,
Pennings Enrico
Publication year - 2011
Publication title -
financial management
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.647
H-Index - 68
eISSN - 1755-053X
pISSN - 0046-3892
DOI - 10.1111/j.1755-053x.2011.01166.x
Subject(s) - value (mathematics) , order (exchange) , business , monetary economics , irrational number , economics , microeconomics , finance , computer science , geometry , mathematics , machine learning
Excessively high pricing by bidders and targets can be explained by new growth opportunities created by the merger or by irrational overpricing in financial markets. We integrate both explanations through a new decomposition of firm value and investigate whether it is “true” growth value or mispricing that drives takeover waves. We find that “bidders buy smart.” Bidders primarily have high market values because of growth opportunities and overpricing, and select targets that are less overpriced with similar fundamental growth value. Bidders also seem to “time smart.” Takeover activity increases when bidders are more overpriced, in order to cushion against price corrections.