The Real Effects of Trend-Seeking and Extrapolation: Evidence from M&As
57 Pages Posted: 6 Jul 2017 Last revised: 10 Dec 2020
Date Written: December 10, 2020
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 Larger earnings surprises are related to increases in bid competition, in takeover premiums, and in withdrawn M&As.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: Suggested Citation