Are Market Reactions to M&As Biased by Overextrapolation of Salient News?

54 Pages Posted: 6 Jul 2017 Last revised: 27 Oct 2018

See all articles by Eliezer M. Fich

Eliezer M. Fich

Drexel University - Department of Finance

Guosong Xu

WHU - Otto Beisheim School of Management

Date Written: October 27, 2018

Abstract

We study earnings surprises involving firms in a takeover target’s 1-digit SIC released hours before the M&A public announcement. We find that these surprises correlate with the acquirers’ M&A announcement return, but not with the returns to 4-digit SIC matched bidder and target peer firms. A week after the M&A announcement, acquirers exhibit a stock price reversal and their response to the earnings surprises disappears. We cannot reconcile these findings with rational Bayesian updating, information transmission, or strategic timing theories. The evidence that salient events affect investors’ M&A valuations, supports behavioral theories predicting asset pricing distortions due to cognitive biases.

Keywords: Salience; Over-extrapolation, Behavioral bias, Mergers and acquisitions; Mispricing; Earnings surprises

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

Suggested Citation

Fich, Eliezer M. and Xu, Guosong, Are Market Reactions to M&As Biased by Overextrapolation of Salient News? (October 27, 2018). 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

WHU - Otto Beisheim School of Management ( email )

Vallendar
Germany

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