Three essays on share price misvaluation
This doctoral dissertation examines the measurement and identification of share price misvaluation using two prominent models. It also examines the role of equity misvaluation in the context of a number of corporate events. The first essay examines abnormal returns surrounding the announcement of stock splits and how this return is related to equity misvaluation and/or growth options of the firm. I find that overvalued firms have lower abnormal returns than undervalued firms and high-growth firms have higher abnormal returns than low-growth firms. Moreover, undervalued firms perform better than overvalued firms in the long run. I conclude that in the short run the market is able to distinguish, at least partially, between valid and false split signals and eventually corrects itself in subsequent years. My second essay examines the role of advertising and the method of payments in mergers or acquisitions. I find that stock-based acquirers have a higher advertising intensity in the pre-merger year when compared with cash-based acquirers and stock-based acquirers are more overvalued than cash-based acquirers prior to the merger. Moreover, managerial ownership in the acquiring firm is positively related to pre-merger advertising intensity where the method of payment is the acquirers' own equity. My third essay compares the Residual Income Model (RIM) by Ohlson [1995. Earnings, book values and dividends in equity valuation. Contemporary Accounting Research 11, 661–687] and the Rhodes-Kropf, Robinson, and Viswanathan model [2005.Valuation waves and merger activity: The empirical evidence. Journal of Financial Economics 77, 561–603]. These two models are used to detect misvaluation. Using publicly traded US firms I find that the Rhodes-Kropf et al. (2005) model is more consistent with theoretical predictions of misvaluation surrounding corporate events such as seasoned equity offerings (SEOs) and open market share repurchases.