Assimilation Effects in Financial Markets

Journal of Financial and Quantitative Analysis, Forthcoming

62 Pages Posted: 6 Jul 2017 Last revised: 19 May 2022

See all articles by Eliezer M. Fich

Eliezer M. Fich

Drexel University - Department of Finance

Guosong Xu

Rotterdam School of Management, Erasmus University

Date Written: April 10, 2022

Abstract

An assimilation bias occurs when people’s evaluative judgement is positively influenced by a previously observed signal. We study this effect by examining investors’ appraisal of M&A deals announced one day after other firms in the same 1-digit SIC as the merging parties release earnings surprises. Consistent with assimilation effects, acquirers’ M&A announcement stock return initially correlates with the previous day’s earnings surprises. This effect reverses after one week. Assimilation generates other distortions as more positive surprises are related to increases in bid competition, takeover premiums, and withdrawn M&As. Evidence from IPOs corroborates the presence of assimilation effects in financial markets.

Keywords: Assimilation effects; Earnings surprises; Mergers and Acquisitions; IPOs; Salience

JEL Classification: D03; G02; G14; G34; M41

Suggested Citation

Fich, Eliezer M. and Xu, Guosong, Assimilation Effects in Financial Markets (April 10, 2022). Journal of Financial and Quantitative Analysis, Forthcoming, Available at SSRN: https://ssrn.com/abstract=2996714 or http://dx.doi.org/10.2139/ssrn.2996714

Eliezer M. Fich (Contact Author)

Drexel University - Department of Finance ( email )

LeBow College of Business
3220 Market Street – 11th Floor
Philadelphia, PA 19104
(215) 895-2304 (Phone)

HOME PAGE: http://https://sites.google.com/view/eliezerfich

Guosong Xu

Rotterdam School of Management, Erasmus University ( email )

Rotterdam
Netherlands

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