The Real Effects of Trend-Seeking and Extrapolation: Evidence from M&As

57 Pages Posted: 6 Jul 2017 Last revised: 10 Dec 2020

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: December 10, 2020

Abstract

We study earnings surprises disclosed hours before M&A announcements in which both merging firms operate in the same 1-digit SIC as the earnings-releasing firms. These surprises correlate with the acquirers’ M&A announcement return. Consistent with behavioral theory, one week after the M&A announcement, acquirers’ response to the earnings surprises disappears. While acquirers’ stock misvaluation is transitory, other effects to the M&A process are permanent. Larger earnings surprises are related to increases in bid competition, in takeover premiums, and in withdrawn M&As. These results indicate that behavioral biases, characterized by trend-seeking and extrapolation, generate material distortions in some M&A transactions.

Keywords: Mergers and acquisitions; Earnings surprises; Trend-seeking; Extrapolation

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

Suggested Citation

Fich, Eliezer M. and Xu, Guosong, The Real Effects of Trend-Seeking and Extrapolation: Evidence from M&As (December 10, 2020). 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)

Guosong Xu

Rotterdam School of Management, Erasmus University ( email )

Rotterdam
Netherlands

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