Do Institutions Prefer High Value Acquirers? An Analysis of Trading in Stock-Financed Acquisitions

Prior literature argues that stock-for-stock mergers are often financed by overvalued stock. How do a target's institutional owners trade when faced with a stock-financed bid, particularly one from an acquirer more likely to be overvalued? If institutional owners perceive the acquirer's stock as overvalued, arguments in Shleifer and Vishny (2003) imply they should sell their holdings more aggressively in order to reap short term profits. We find, however, that while institutions are net sellers in stock-for-stock deals they retain significantly more shares when valuation measures a greater potential for acquirer overvaluation. We also find that share retention is increasing in the acquirer's price-to-book ratio regardless of whether the institution prefers growth or value stocks. Institutions with large-cap, growth-stock preferences are particularly enthusiastic about bids from large high price-to-book acquirers, substantially increasing their stakes in such deals