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Market/investor Misvaluation Effect Merger and Aquisition Activity
Finance & Accounting
Pages 8 (2008 words)
Market/Investor Misvaluation Effect Merger and Acquisition Activity Literature Review: Introduction: When a company under take another company and it clearly established under the new owner is called as acquisition of company. When two companies same size and doing same business agreed to go forward as a new single company it is called as merger of companies.
When firms decided to merge or acquire it faces many issues among them one of the important problem is its valuation or the payments. Sometimes the companies may make misevaluation in its stock misevaluation of stock means artificially increase the value of share. Overvalued firm use their overvalued shares to purchase comparatively undervalued firm. If managers are confident regarding the performance of the firm after the merger market valuation is less matter. “If bidder managers are overconfident, market valuation should matter less, because overconfident managers would not perceive their firms as overvalued by the market. In this case, target preferences would probably be of primary importance” (Giuli 2007, p. 8). According to Todd A. Brown in his article called, “Managerial Optimism and Market Misvaluation: the Effects on Mergers and Acquisitions” says that, Mergers and acquisitions between the companies can be viewed as a one of the most efficient device for correcting the inefficiency of the market. One of the major assumptions behind this is that markets are basically inefficient or ineffective, so some of the organizations are valued wrongly. In this particular circumstance, managers of the organizations are unbiased and they take benefit of that ineffectiveness of the market. Therefore market valuations can drive M&A. ...
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