188 Int. J. Banking, Accounting and Finance, Vol. 5, Nos. 1/2, 2013 Copyright © 2013 Inderscience Enterprises Ltd. Does overvaluation of bidder stock drive acquisitions? The case of public and private targets Kose John Stern School of Business, New York University, 44 West Fourth Street, Suite 9-190, New York, NY 10012, USA E-mail: kjohn@stern.nyu.edu Ravi S. Mateti* John Molson School of Business, Concordia University, 1455 De Maisonneuve Blvd. West, Montreal, Quebec, H3G 1M8, Canada E-mail: rmateti@jmsb.concordia.ca *Corresponding author Zhaoyun Shangguan School of Business, Robert Morris University, 6001 University Boulevard, Moon Township, PA 15108, USA E-mail: shangguan@rmu.edu Gopala Vasudevan Charlton College of Business, University of Massachusetts Dartmouth, 285 Old Westport Road, North Dartmouth, MA 02747, USA E-mail: gvasudevan@umassd.edu Abstract: We test the implications of the misvaluation hypothesis (Shleifer and Vishny, 2003) for a large sample of acquirers of private and public target firms. Consistent with the misvaluation hypothesis we find that acquirers are overvalued. The overvaluation is higher for stock acquisitions of private targets. We find that the announcement period returns are lower for firms that are overvalued at the time of acquisition. Announcement period returns are lower for larger acquisitions of public targets and higher for larger acquisitions of private targets. We also examine the factors that determine stock as the method of payment. Consistent with the misvaluation hypothesis we find that firms that have higher valuation measures at the time of acquisition tend to use stock. Acquirers of public targets tend to use stock more frequently.