The Vicarious Wisdom of Crowds: Toward a Behavioral Perspective on Investor Reactions to Acquisition Announcements

23 Pages Posted: 23 May 2012

See all articles by Mario Schijven

Mario Schijven

Texas A&M University - Department of Management

Michael A. Hitt

Texas A&M University - Department of Management; Texas Christian University

Date Written: 2012

Abstract

Although event-study methodology is invaluable to strategic management research, we argue that the traditional financial economic rationale on which it is based has led scholars to assume away the behavioral mechanisms underlying investor reactions. Building on behavioral theory from management, psychology, and economics, we set out to develop a behavioral perspective on investor reactions to acquisition announcements — one that relaxes the assumption of investors making objective, rational-deductive calculations. Given the information asymmetry they face, we theorize that investors (1) infer management’s perception of an acquisition’s synergistic potential from the premium it pays, and (2) draw on additional public information to assess the reliability of that perception. Using a multi-industry sample of acquisitions by North American firms, we find considerable support for our behavioral framework.

Keywords: behavioral theory, investor reactions, management perceptions, acquisition premium, event-study methodology

Suggested Citation

Schijven, Mario and Hitt, Michael A., The Vicarious Wisdom of Crowds: Toward a Behavioral Perspective on Investor Reactions to Acquisition Announcements (2012). Strat. Mgmt. J. (2012), Mays Business School Research Paper No. 2012-17, Available at SSRN: https://ssrn.com/abstract=2064838

Mario Schijven (Contact Author)

Texas A&M University - Department of Management ( email )

430 Wehner
College Station, TX 77843-4218
United States

Michael A. Hitt

Texas A&M University - Department of Management ( email )

430 Wehner
College Station, TX 77843-4218
United States
979-458-3393 (Phone)

Texas Christian University ( email )

Fort Worth, TX 76129
United States

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