Stock Market Driven Acquisitions versus the Q Theory of Takeovers - The UK Evidence

Abstract

Using a sample of UK mergers and acquisitions from 1985-2004, we show that equity over-valuation appears to play an important role in the determination of financing method. Our results are broadly consistent with the Sheifer and Vishny (2003) theory of market-driven acquisitions rather than a Q-theory explanation. In some contrast to the US results of Dong et al (2006) we find that over-valuation appears to be the more persuasive explanation for acquisition behaviour in the UK, although like them we cannot comprehensively reject a Q-theory explanation. Given the evidence in favour of the Shleifer-Vishny hypothesis, we argue that a selection model is necessary in when investigate the long run performance of acquirers, and present results which indicate that there is some evidence of high-Q acquirers performing better, but only amongst the cash acquirer sub-sample.

JEL Classification: G14, G34