Are Mergers Driven by Overvaluation? Evidence from Managerial Insider Trading Around Merger Announcements

This paper aims to understand whether “overvaluation ” is a plausible motive behind the recent merger activity by examining the insider trades of acquirer firm managers prior to merger announcements for 2,105 mergers from 1983 to 2001. If managers perceive own company stock as “overvalued ” they will be more willing to buy other firms for stock. At the same time they will be more willing to sell company stock in their personal portfolios. Using this simple prediction, I show that acquirer-firm managers abnormally increase their insider sales prior to stock mergers and bad mergers, whereas no such change is observed prior to cash mergers and good mergers. The increased willingness of managers to sell stock prior to stock mergers provides preliminary evidence for the “overvaluation” motive behind the mergers