Download This PaperAssimilation Effects in Financial Markets
Journal of Financial and Quantitative Analysis, Forthcoming
62 Pages Posted: 6 Jul 2017 Last revised: 19 May 2022
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other distortions as more positive surprises are related to increases in bid competition, takeover premiums, and withdrawn M&As.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
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