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DO INSTITUTIONS PREFER HIGH-VALUE ACQUIRERS? AN ANALYSIS OF TRADING IN STOCK-FINANCED ACQUISITIONS

Authors


  • We thank the referee and the editors, Gerald Gay and Jayant Kale, for suggestions that improved the analysis and exposition. We additionally thank Gennaro Bernile, Angela Morgan, Qingqing Wu, and seminar participants at the 2008 Financial Management Association (FMA) annual meeting, the 2009 Financial Intermediation Research Society (FIRS) conference, Arizona State University, Drexel University, the University of California at Riverside, and the University of South Florida for helpful comments. And we thank Brian Bushee for providing data classifying institutions by investment style. Any remaining errors are our own.

Abstract

If owners of target shares in a stock-for-stock merger perceive the acquirer as overvalued, they should sell their holdings more aggressively to profit before such overvaluation dissipates. We study institutional owners of targets and find that slightly more than half liquidate their shares in stock mergers, consistent with high institutional-share turnover rates found in the prior literature. However, share retention is higher when valuation measures suggest greater acquirer overvaluation, regardless of whether institutional owners generally prefer growth or value stock. Institutions that prefer large-cap, growth stock are most enthusiastic about bids from large, high-valuation acquirers, and substantially increase their stakes in such deals.

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