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Stock liquidity, empire building, and valuation

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  • Chatterjee, Sris
  • Hasan, Iftekhar
  • John, Kose
  • Yan, An

Abstract

We conjecture that high stock liquidity negatively affects firm valuation by inducing inefficient investment. Using takeovers of public targets to study the empire-building motive, we find that a liquid firm is more likely than an illiquid firm to acquire a public firm. Such a takeover by a bidder with higher stock liquidity destroys bidder value to a larger degree. These patterns occur in both stock and cash acquisitions and hold after we use decimalization of tick size as a quasi-exogenous shock to stock liquidity. Finally, we show that financial constraints and corporate governance play important roles in the effects of stock liquidity on empire building in mergers and acquisitions.

Suggested Citation

  • Chatterjee, Sris & Hasan, Iftekhar & John, Kose & Yan, An, 2021. "Stock liquidity, empire building, and valuation," Journal of Corporate Finance, Elsevier, vol. 70(C).
    • Handle: RePEc:eee:corfin:v:70:y:2021:i:c:s0929119921001735
    DOI: 10.1016/j.jcorpfin.2021.102051
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    Cited by:

    1. Delis, Manthos D. & Kazakis, Pantelis & Zopounidis, Constantin, 2023. "Management and takeover decisions," European Journal of Operational Research, Elsevier, vol. 304(3), pages 1256-1268.
    2. Huang, Sheng & Maharjan, Johan & Nanda, Vikram, 2024. "Liquid stock as an acquisition currency," Journal of Corporate Finance, Elsevier, vol. 85(C).
    3. Huang, Ying Sophie & Guo, Feng & Ma, Lina, 2023. "Do M&A funds create value in Chinese listed firms?," Pacific-Basin Finance Journal, Elsevier, vol. 79(C).

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    More about this item

    Keywords

    Stock liquidity; Empire building; Mergers and acquisitions;
    All these keywords.

    JEL classification:

    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance

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