Title page for ETD etd-04032012-212055


Type of Document Dissertation
Author Li, Wei-Hsien
URN etd-04032012-212055
Title Two Essays on Mergers and Acquisitions
Degree PhD
Department Finance, Insurance, and Business Law
Advisory Committee
Advisor Name Title
Easterwood, John C. Committee Co-Chair
Ince, Ozgur S. Committee Co-Chair
Keown, Arthur J. Committee Member
Mansi, Sattar A. Committee Member
Keywords
  • CEO Learning
  • Managerial bias
  • Overconfidence
  • Asset reallocation
  • Valuation
  • M&As
Date of Defense 2012-03-28
Availability restricted
Abstract
This dissertation consists of two chapters. The first chapter examines the valuation effect of the Q-hypothesis of mergers and acquisitions. The Q-hypothesis of mergers and acquisitions proposes that takeovers of low-Q targets by high-Q acquirers should be value creating as acquirers redeploy the targets’ assets. I revisit the valuation effects of mergers and acquisitions by considering the potential costs of asset reallocation, impact from misvaluation, and the size of the reallocated assets. By examining the combined announcement returns and changes in operating performance, I find evidence consistent with both the benefits and costs of asset reallocation in the full sample of M&As from 1989 to 2010. Controlling for impact for market misvaluation in the proxy of Q, I find that the relation between value creation and the Q-difference is an inverse U-shape. This is direct evidence in support of the Q-hypothesis of M&As using firm-level data from after 1990. The results are not driven by the acquirer’s corporate governance structure and the difference in industry.

The second chapter investigates investigate the effect of CEO overconfidence on learning from the market in completing the announced mergers and acquisitions (M&As). Overconfident CEOs overestimate their ability to create value and believe that the market incorrectly values the firm. Therefore, they will be less likely to revise their M&A announcement according to unfavorable market reaction. I construct a proxy for CEO overconfidence based on the CEO’s decisions on exercising options similar to Malmendier and Tate (2005, 2008). Controlling for the corporate governance structure of the firm, I find that an overconfident CEO is more likely to complete a bid despite unfavorable market feedback. I do not find my results are driven by alternative interpretations including managerial quality and private information.

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