How mispriced equities drive the corporate takeover market: Comparison of developed and developing markets

This study investigates how mispriced equity affects mergers and acquisitions (M&A). It aims to provide evidence on the impact of mispriced equity on payment method, preannouncement premium, and post-merger returns of acquirer. Three models have been formed to estimate the impact of mispricing on each of the variables separately. Logistic regression and multiple regression models have been used for the empirical analyses. Sample of the study includes mergers and acquisitions cases from G7 (as representatives of developed economies) and E7 (as representatives of developing economies) economies for the period of January 2001 to December 2017. Results show that overvalued acquirers prefer to pay by stocks in the takeovers in both developed and developing markets. In developed economies, overvalued acquirers prefer stock as the payment method whereas in developing economies, overvalued acquirer prefer the combination of cash and stock as a payment method. Empirical findings revealed that stock returns of the acquirer decreased by 1% on average in the year following the takeover. Results suggest that overvalued acquirers also experience a decline in stock returns in both developed and developing markets. Results of preannouncement model show that average preannouncement premium of the target's stock is 30% in developed markets, and 16% in the developing markets. Furthermore, analysis suggests that undervaluation of the target's stock increases the preannouncement premium in developed markets whereas in the developing economies mispricing of the target has no significant relationship with preannouncement premium. These conflicting findings may be due to differences in the institutional environments, corporate governance practices, and market structure of these economies. Keywords: Mispriced equity, Overvalued equity, Takeover, mergers and acquisitions, G7, E7