Scandinavian Working Papers in Economics

Working Paper Series,
Research Institute of Industrial Economics

No 1157: Misvaluation and Financial Constraints: Method of Payment and Buyer Identity in Mergers & Acquisitions

Aron Berg ()
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Aron Berg: Research Institute of Industrial Economics (IFN), Postal: P.O. Box 55665, SE-102 15 Stockholm, Sweden

Abstract: The paper studies how stock price misvaluation and financial frictions affect whether an acquisition occurs between or within industries and whether the acquirer pays in cash or stocks. I set up a model where stock market misvaluation correlates within industries and across industries and assume that managers have private information regarding their own firm and firms similar to it. The model yields predictions regarding which firm acquires which firm, and the method of payment used in transactions.

Keywords: Mergers and acquisitions; Investments; Asymmetric information; Stock misvaluation; Financial frictions

JEL-codes: D82; G32; G34

32 pages, March 15, 2017

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