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Surprisingly few papers have attempted to develop a direct empirical test for overbidding in merger and acquisition contests. We develop such a test grounded on a necessary condition for profit-maximizing bidding behavior. The test is not subject to endogeneity concerns. Our results strongly support the existence of overbidding. We provide evidence that overbidding is related to conflicts of interest, but also some indirect evidence that it arises from failing to fully account for the winner’s curse.

The number of merger and acquisition (M&A) transactions paid fully in stock in the U.S. market declined sharply after 2001, when pooling and goodwill amortization were abolished by the Financial Accounting Standards Board. Did this accounting rule change really have such far reaching implications? Using a difference-in-differences test and Canada as a counterfactual, this study reveals that it did. We also report several other results confirming the role of pooling abolishment, including (i) that the decrease in full stock payment relates to CEO incentives and (ii) that previously documented determinants of the M&A mode of payment cannot explain the post-pooling abolishment pattern. These results are also robust to controls for various factors, such as the Internet bubble, the exclusion of cross-border deals, the presence of Canadian cross-listed firms, the use of a constant sample of acquirers across the pooling and post-pooling abolishment periods, the use of Europe as an alternative counterfactual, and controls for the SEC Rule 10b-18 share repurchase safe harbor amendments of 2003. This paper was accepted by Shivaram Rajgopal, accounting.

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