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Do Stock Mergers Create Value for Acquirers?



  • QI LU

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    • Pavel Savor is at the Wharton School, University of Pennsylvania. Qi Lu is at the Kellogg School of Management, Northwestern University. We would like to thank John Graham (the Co-editor); an anonymous referee; Torben Andersen; Philip Bond; Joshua Coval; Janice Eberly; Kathleen Hagerty; Carin Knoop; Arvind Krishnamurthy; Andrew Metrick; Michael Roberts; Paola Sapienza; Erik Stafford; Rene Stulz; Luis Viceira; Beverly Walther; and seminar participants at Boston College, Emory University, Harvard University, Massachusetts Institute of Technology, Northwestern University, University of Notre Dame, and University of Pennsylvania for many valuable comments and discussions. We are especially grateful to Malcolm Baker, Kent Daniel, Michael Fishman, Todd Pulvino, Andrei Shleifer, and Jeremy Stein for their help and support. Any remaining errors are our own.


This paper finds support for the hypothesis that overvalued firms create value for long-term shareholders by using their equity as currency. Any approach centered on abnormal returns is complicated by the fact that the most overvalued firms have the greatest incentive to engage in stock acquisitions. We solve this endogeneity problem by creating a sample of mergers that fail for exogenous reasons. We find that unsuccessful stock bidders significantly underperform successful ones. Failure to consummate is costlier for richly priced firms, and the unrealized acquirer-target combination would have earned higher returns. None of these results hold for cash bids.