The Devil is in the Detail? Investors’ Mispricing of Proxy Voting Outcomes on M&A Deals

Abstract

Shareholders’ approval rates on M&A deals are informative, because they are predictive of the acquirer’s post-merger operating performance. Since the passing of the deal is salient information while the specific approval rate is not, investors may misprice the detailed voting outcome due to their limited attention. We find that post-merger abnormal stock returns are significantly higher for acquirers receiving higher approval rates: a one percentage point increase in the approval rate is associated with a 48 basis point increase in the market-adjusted stock return in the year after the merger is completed. Consistent with mispricing, the voting outcome reliably predicts post-merger earnings announcement returns and analyst forecast errors. What’s more, the association between the voting outcome and post-merger stock returns is stronger when investors’ attention to the voting outcome is distracted by same-day earnings announcements and when the marginal investor is less likely to be sophisticated. Overall, our results suggest that detailed proxy voting outcomes are neglected by investors.

Keywords: Market inefficiency, Shareholder voting, Mergers and acquisitions, Post-merger performance

JEL Classification: G12, G14, G34