After recent accounting scandals in once high-flying firms like Enron and WorldCom, man- agement behavior has been under close scrutiny by regulators, financial media, and researchers. Jensen (2005) argues that the dramatic increase in corporate scandals around the turn of the cen- tury can be explained by agency costs of overvalued equity: when a firm’s equity is substantially overvalued, managers are forced to take value-destroying actions (some perhaps fraudulent) to satisfy the market’s unrealistic growth expectations. One action that firms often take is to acquire other companies using their overvalued equity. Recent studies showthat some firms engage in certain activities that inflate their equity values or prevent their.
