Abstract
Using managers' personal trading decisions as a window into their belief on firm's valuations, this paper directly examines whether overvaluation is a motive for acquisitions and provides evidence on the consequences of overvalued equity. My findings show a sharp contrast in the behavior of acquirer's insiders between the earlier period and the 'hot market' period of the late 1990s. Moreover, the strong relation between insider trading patterns prior to the acquisition announcement and long-run post-acquisition performance in the later period suggests that acquisitions by overvalued companies are value-destroying and the poor subsequent stock performance is not only a correction of overvaluation.
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