Does Investor Misvaluation Drive the Takeover Market?






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    • Dong is from the Schulich School of Business, York University. Hirshleifer and Teoh are from the Fisher College of Business, Ohio State University. Richardson is from Wharton School, University of Pennsylvania. We thank two anonymous referees, Kent Daniel, Francois Derrien, Rick Green, Mark Grinblatt, Jack Hirshleifer, Shawn Humphrey, Danling Jiang, Steve Kaplan, Andrew Karolyi, Sonya Seongyeon Lim, John Lott, Vikram Nanda, Jay Ritter, David Robinson, Anna Scherbina, Andrei Shleifer, Christof Stahel, Robert Stambaugh, René Stulz, Sheridan Titman, Tuomo Vuolteenaho, Ralph Walkling, Ivo Welch, Karen Wruck, Jeffrey Wurgler, and participants at the 2003 Western Finance Association Meetings in Los Cabos, Mexico, the 2003 European Finance Association Meetings in Glasgow, Scotland, the 2003 National Bureau of Economic Research Behavioral Finance Program Meeting at the University of Chicago, the 2003 conference “Analyzing Conflict: Insights from the Natural and Social Sciences” at UCLA, and at seminars at Columbia University, Harvard Business School, Ohio State University, Tilburg University, and York University for very helpful comments and suggestions.


This paper uses pre-offer market valuations to evaluate the misvaluation and Q theories of takeovers. Bidder and target valuations (price-to-book, or price-to-residual-income-model-value) are related to means of payment, mode of acquisition, premia, target hostility, offer success, and bidder and target announcement-period returns. The evidence is broadly consistent with both hypotheses. The evidence for the Q hypothesis is stronger in the pre-1990 period than in the 1990–2000 period, whereas the evidence for the misvaluation hypothesis is stronger in the 1990–2000 period than in the pre-1990 period.