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

49 Pages Posted: 6 Jul 2017 Last revised: 13 Sep 2019

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: September 8, 2019

Abstract

We study earnings surprises involving firms in a takeover target's 1-digit SIC released hours before M&A announcements. These surprises correlate with the acquirers' M&A announcement return. Consistent with the effect of behavioral biases, a week after the M&A announcement, acquirers' response to the earnings surprises disappears. While the acquirers' stock misvaluation is transitory, other effects are not. We also show that larger earnings surprises are related to increased bid competition, to higher premiums received by target shareholders, and to more withdrawn M&As. These results indicate that behavioral biases, characterized by trend-seeking and extrapolation, create 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 (September 8, 2019). 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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