Financial Media, Price Discovery, and Merger Arbitrage
Review of Finance, 25(4) (2021), 997-1046
77 Pages Posted: 26 Oct 2016 Last revised: 3 Aug 2021
Date Written: July 17, 2020
Using merger announcements and applying methods from computational linguistics we find strong evidence that stock prices underreact to information in financial media. A one standard deviation increase in the media-implied probability of merger completion increases the subsequent 12-day return of a long-short merger strategy by 1.2 percentage points. Filtering out the 28% of announced deals with the lowest media-implied completion probability increases the annualized alpha from merger arbitrage by 9.3 percentage points. Our results are particularly pronounced when high-yield spreads are large and on days when only few merger deals are announced.
Keywords: Financial Media, Merger Arbitrage, Hedge Funds, Market Efficiency, Mergers and Acquisitions
JEL Classification: G11, G14, G34
Suggested Citation: Suggested Citation