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Do Equity Mispricing and Management Compensation Incentives Drive Bank Mergers?

This study tests whether bank mergers are associated with valuation gains and examines how equity overvaluation and management compensation incentives influence any valuation effects. Our evidence shows that bidders are overvalued relative to their targets, especially in equity offer deals. We also find that highly valued bidders are (i) more likely to use stock than cash, (ii) are willing to pay more relative to the target market price, (iii) are more likely to acquire private than public targets, (iv) earn lower announcement-period returns, (v) fail to create synergy gains, (vi) experience long-term underperformance, and (vii) reward their top managers of with large compensation increases subsequent to mergers.