Running Title: Could Market Misvaluation Explain Post-Merger Underperformance

We examine the relation between pre-acquisition market misvaluation and long run post-acquisition performance for U.S. stock-for-stock mergers undertaken between 1984 and 2003. With a simple inference we believe that market misvaluation might explain the post-merger underperformance anomaly. Our empirical results echo this point by showing that post-merger stock returns are negatively and significantly related to the pre-merger market overvaluation. Moreover, we present the findings that the stock-financing acquirers ’ post-merger underperformance documented in previous studies is only confined to the pre-event highly overvalued subset, and are able to eliminate the concern that our finding is due to either overpayment or overvaluation driven by bad mergers. Our results are robust irrespective of the return evaluation method and market conditions, or after controlling for several acquirers ’ characteristics