Are recent post-IPO stock acquirers influenced by Jensen’s overvalued stock hypothesis?

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School of Business | Master's thesis
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Using overvalued stock as a method of payment for acquisitions commonly raises the question of whether managers are influenced by Jensen’s overvalued stock hypothesis. Jensen’s overvalued stock hypothesis posits that managers are pressured to engage in value-destructive investments to justify the high valuation of equity. Additionally, the cheap and accessible equity capital, as well as the overconfidence and enthusiasm of recent IPO firms are expected to further exacerbate this behavior. As a result, post-IPO stock acquisitions are expected to underperform post-IPO cash acquisitions. Taking a sample of 760 stock-financed acquisition post-five-years IPO from 1 January 1985 to 31 December 2009, this paper references the (i) linear prediction model and (ii) various propensity score matching methodology by Golubov, Petmezas, and Travlos (2015) to obtain the pure takeover effect, independent of equity issuance effect. The paper presents a univariate analysis on the pure takeover effect for cash and stock-acquirers respectively. With a multivariate regression, the paper also compares the effect of stock as a method of payment, against other firm and deal-related characteristics. This paper does not find evidence of Jensen’s overvalued equity hypothesis, indicating that there are no signs of post-IPO managers being influenced by Jensen’s overvalued equity pressure, i.e. managers are not wrongly incentivized to pursue negative net present value investments. This is consistent with the general research conducted on both recent IPO and mature acquirers by Golubov, Petmezas, and Travlos (2015). The analysis on post-one-year and three-years IPO also do not present evidence for Jensen’s hypothesis. This puzzle might be resolved by future research on stringent public market regulations and the influence of institutional ownership, both for recent IPO and mature public firms.
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Lof, Matthijs
post-IPO, agency cost, overvalued stock hypothesis, stock-financed M&A
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