Do Institutions Prefer High Value Acquirers? An Analysis of Trading in Stock-Financed Acquisitions

46 Pages Posted: 24 Mar 2008 Last revised: 28 May 2008

See all articles by Timothy R. Burch

Timothy R. Burch

University of Miami - Department of Finance

Vikram K. Nanda

University of Texas at Dallas - School of Management - Department of Finance & Managerial Economics

Sabatino Silveri

University of Memphis - Fogelman College of Business and Economics

Multiple version iconThere are 3 versions of this paper

Date Written: May 23, 2008

Abstract

Prior literature argues that stock-for-stock mergers are often financed by overvalued stock. How do a target's institutional owners trade when faced with a stock-financed bid, particularly one from an acquirer more likely to be overvalued? If institutional owners perceive the acquirer's stock as overvalued, arguments in Shleifer and Vishny (2003) imply they should sell their holdings more aggressively in order to reap short term profits. We find, however, that while institutions are net sellers in stock-for-stock deals they retain significantly more shares when valuation measures a greater potential for acquirer overvaluation. We also find that share retention is increasing in the acquirer's price-to-book ratio regardless of whether the institution prefers growth or value stocks. Institutions with large-cap, growth-stock preferences are particularly enthusiastic about bids from large high price-to-book acquirers, substantially increasing their stakes in such deals.

Keywords: Mergers and acquisitions, takeovers, institutional trading, overvaluation

JEL Classification: G34

Suggested Citation

Burch, Timothy R. and Nanda, Vikram K. and Silveri, Sabatino, Do Institutions Prefer High Value Acquirers? An Analysis of Trading in Stock-Financed Acquisitions (May 23, 2008). Available at SSRN: https://ssrn.com/abstract=1107524 or http://dx.doi.org/10.2139/ssrn.1107524

Timothy R. Burch (Contact Author)

University of Miami - Department of Finance ( email )

P.O. Box 248094
Coral Gables, FL 33124-6552
United States
305-284-1509 (Phone)
305-284-4800 (Fax)

HOME PAGE: http://www.bus.miami.edu/~tburch

Vikram K. Nanda

University of Texas at Dallas - School of Management - Department of Finance & Managerial Economics ( email )

2601 North Floyd Road
P.O. Box 830688
Richardson, TX 75083
United States

Sabatino Silveri

University of Memphis - Fogelman College of Business and Economics ( email )

3675 Central Avenue
Memphis, TN 38152
United States

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
49
Abstract Views
881
PlumX Metrics