Noise Demand, Limits of Arbitrage, and Stock Price Bubbles: Evidence from Mergers and Acquisitions

51 Pages Posted: 4 Apr 2017 Last revised: 24 Mar 2018

See all articles by Qingzhong Ma

Qingzhong Ma

California State University, Chico

David A. Whidbee

Washington State University - Department of Finance, Insurance and Real Estate

Wei Athena Zhang

California State University, Chico - Department of Finance and Marketing

Date Written: March 20, 2018

Abstract

We hypothesize there is an increased noise demand for stocks of acquirers in response to acquisition announcements and that the demand is greater for acquirers with higher uncertainty in their equity valuation. Using idiosyncratic volatility to measure uncertainty, we find support for limits of arbitrage theories. Announcement period abnormal returns are higher for more uncertain acquirers, but the return pattern reverses over the longer term, resembling a transitory price bubble. The bubble is greater when deal and firm characteristics exacerbate the limits of arbitrage and it weakens over time. Also, transactions by more uncertain acquirers are more likely to fail.

Keywords: Mergers; Acquisitions; Noise demand; Limits of arbitrage; Behavioral finance; Price efficiency

JEL Classification: G31 G34 G40

Suggested Citation

Ma, Qingzhong and Whidbee, David A. and Zhang, Wei Athena, Noise Demand, Limits of Arbitrage, and Stock Price Bubbles: Evidence from Mergers and Acquisitions (March 20, 2018). Available at SSRN: https://ssrn.com/abstract=2945276 or http://dx.doi.org/10.2139/ssrn.2945276

Qingzhong Ma

California State University, Chico ( email )

325 Tehama Hall
Chico, CA 95929
United States

David A. Whidbee (Contact Author)

Washington State University - Department of Finance, Insurance and Real Estate ( email )

Todd 470
Pullman, WA 99164-4746
United States
509-335-3098 (Phone)
509-335-3857 (Fax)

Wei Athena Zhang

California State University, Chico - Department of Finance and Marketing ( email )

United States

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