Stock market driven acquisitions versus the Q theory of takeovers – The UK evidence

Authors' draft issued as working paper dated June 2009. Final version published in Journal of Business Finance and Accounting. Available online at http://onlinelibrary.wiley.com/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 those theories based upon market over-valuation driving mergers and their financing, rather than a Q-theory explanation. In some contrast to the US results of Dong et al. (2006) we find that proxies for over-valuation appear to be the more persuasive explanation for acquisition financing behaviour in the UK. Given the evidence in favour of valuation effects, we argue that a treatment effects model is necessary in investigating the long-run performance of acquirers. Taken together with results from a univariate analysis, such a model reveals some modest support for the Shleifer and Vishny (2003) hypothesis