Overvalued stock: M&A or SEO? A study of the performance and decision making of overvalued firms.
Sammanfattning: This study examines two ways of exploiting overvalued stock by US firms: Conducting a seasoned equity offering (SEO) or a stock swap acquisition. As market misvaluations provide short-term opportunities for managers to receive large potential gains, the decision of how to utilize stock overvaluation can have a significant impact on the value created. We find stock swap acquisition to be the superior choice, providing positive effects on long-term operating performance and positive announcement returns. The SEO alternative appears, on the other hand, detrimental for firms with long-term operating performance and announcement returns being significantly negatively affected. Rather than deeming it an irrational decision by managers, we argue that the choice of pursuing an SEO can be attributed to different firm characteristics. Our findings show that firms with a high near-term cash need have a higher likelihood of conducting an SEO, while more mature firms tend to choose a stock swap acquisition instead. These findings support the expectations that more mature firms have lower immediate cash need as they generally have more established continuous cash flows, whereas younger firms require more cash due to the nature of their growth-oriented investments
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