ABSTRACT This paper uses pre‐offer market valuations to evaluate the misvaluation and Q theories of takeovers. Bidder and target valuations (price‐to‐book, or price‐to‐residual‐income‐model‐value) are related to means of payment, mode of acquisition, premia, target hostility, offer success, and bidder and target announcement‐period returns. The evidence is broadly consistent with both hypotheses. The evidence for the Q hypothesis is stronger in the pre‐1990 period than in the 1990–2000 period, whereas the evidence for the misvaluation hypothesis is stronger in the 1990–2000 period than in the pre‐1990 period.