Disagreement and the Informativeness of Stock Returns: The Case of Acquisition Announcements

Abstract

We examine whether disagreement between managers and investors relates to the informativeness of bidder returns around acquisition announcements. We predict that greater disagreement about the merits of an acquisition creates uncertainty about investors’ revaluation of acquiring firms, making returns less informative. We document an inverse relation between bidder returns and the change in bidders’ implied volatility. This relation is only significant when there is more disagreement. Also, the relation between bidder returns and the likelihood of deal completion is stronger when announcement returns are more informative, suggesting managers “listen to the market” more when the market response is more informative.

Keywords: Disagreement, informativeness, acquisitions, implied volatility, uncertainty, bidder returns

JEL Classification: G3