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Buy Smart, Time Smart: Are Takeovers Driven by Growth Opportunities or Mispricing?


  • This paper corresponds to Chapter 4 of Van Bekkum's Ph.D. dissertation from Tinbergen Institute, Netherlands. The authors would like to thank the members of his dissertation committee for their comments. The authors are especially grateful to Anjolein Schmeits, an anonymous referee for valuable comments and suggestions, and to Bill Christie (Editor).


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.

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