Hot Markets, Momentum and Investor Sentiment in UK Acquisitions

Abstract

We examine the links between hot markets and momentum in explaining merger waves using a sample of 881 UK acquisitions from 1985 to 2000. We find evidence of short run positive abnormal returns (or merger momentum) in both hot and cold markets. We find evidence of long run reversal. The post acquisition abnormal returns are negative over three years for the whole sample. We also find an interesting pattern in the long run reversal. Mergers announced in hot markets have higher announcement period abnormal returns than mergers announced in cold markets consistent with momentum. Over a one year horizon there is a reversal in the abnormal returns consistent with investor sentiment: mergers announced in hot markets have lower negative returns than mergers announced in cold markets. Interestingly, the abnormal returns over three years show a further reversal and are higher for mergers announced in hot markets than for those announced in cold markets.

Keywords: Irrational investors, Long-run underperformance

JEL Classification: G34