Capital misallocation in mergers and acquisitions

Abstract

This study identifies the factors that affect capital misallocation in Chinese M&A market, focusing on target firm’s intrinsic value and information quality. Our findings reveal that intrinsic value positively influences acquisitions premiums, while high-quality information mitigates this effect. This suggests that Chinese acquirers may overpay for target firm’s intrinsic value or that capital misallocation is prevalent in Chinese M&A market. Robustness and heterogeneity analyses further confirm that capital misallocation is particularly evident in inter-regional and inter-industry transactions, acquisitions of targets in developing economies, during economic shocks, and deals involving high-tech firms. Additionally, from the dual perspectives of acquirer and target motivations, we highlight the pivotal role of information quality in contributing to capital misallocation and propose targeted strategies to address this issue within both domestic and international M&A contexts.