Lucian Taylor is Assistant Professor of Finance at the University of Pennsylvania. This post is based on an article authored by Professor Taylor; Di Li, Assistant Professor of Finance at Georgia State University; and Wenyu Wang, Assistant Professor of Finance at Indiana University.
The main goal of our paper, Inefficiencies and Externalities from Opportunistic Acquirers, which was recently made publicly available on SSRN, is to quantify a potential inefficiency in the mergers and acquisitions (M&A) market. If a firm believes its shares are overvalued, then it has an incentive to acquire other companies and pay using its overvalued shares rather than cash. This behavior creates an inefficiency: Overvalued, opportunistic acquirers may crowd out other acquirers that have higher synergies. The inefficiency, in other words, is a lost synergy. Researchers have raised concerns about this inefficiency, but it remains unclear whether the inefficiency is large or small. Our main contribution is to show that the aggregate inefficiency from opportunistic acquirers is actually quite modest, meaning the M&A market usually allocates resources efficiently. We do find, however, that the inefficiency is large for certain deals and during times when misvaluation is more likely. We also show that misvaluation results in a large wealth transfer from undervalued to overvalued acquirers, and it makes access to cash valuable for synergistic acquirers.
