How Informative Are Acquirer Announcement Returns? Evidence from Merger Waves

Abstract

We hypothesize that investors with limited cognitive capacity cannot accurately process complex corporate transactions such as mergers and acquisitions over a short announcement window. As a result, short-term announcement returns are poor indications of long-term value creation. Analyzing a sample of deals categorized by industry merger waves, we identify acquirer overvaluation as an example of critical, hard-to-process factors affecting long-term performance. Our findings reveal that short-term acquirer returns largely reflect surface-level information such as deal characteristics, while deeper valuation effects take years to influence stock prices. Our results highlight the limited utility of short-term announcement returns in assessing acquisition value.

Keywords: acquirer announcement return, long-run stock performance, industry merger waves, stock misvaluation, limited attention

JEL Classification: G14, G34, G41