Does Investor Misvaluation Drive the Takeover Market?

Ming Dong, David Hirshleifer, Scott Richardson, and Siew Hong Teoh

Journal of Finance, April 2006


This paper uses pre-offer market valuations to evaluate the misvaluation and Q theories
of takeovers. Bidder and target valuations (price-to-book, or price-to-residualincome-
model-value) are related to means of payment, mode of acquisition, premia,
target hostility, offer success, and bidder and target announcement-period returns.
The evidence is broadly consistent with both hypotheses. The evidence for the Q hypothesis is stronger in the pre-1990 period than in the 1990–2000 period, whereas the
evidence for the misvaluation hypothesis is stronger in the 1990–2000 period than in
the pre-1990 period.

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