Mistaking Bad News for Good News? M&A Optimism and Mispricing of Strategic Alternatives Announcements

65 Pages Posted: 11 Jan 2023 Last revised: 6 Dec 2023

See all articles by Hyun Jung Rim

Hyun Jung Rim

George Washington University

Jenny Zha Giedt

George Washington University - School of Business

Date Written: December 5, 2023

Abstract

An announcement that a company is evaluating strategic alternatives is one of the most disruptive corporate events, since the company is calling into question its future existence. This event also results in one of the most severe cases of stock mispricing. We seek to understand why mispricing occurs. Our empirical findings are consistent with the availability heuristic (Tversky and Kahneman, 1973)—a behavioral bias—causing investors to overweight a potential merger or acquisition and not fully incorporate the negative fundamental news conveyed. In addition, in an experiment, we activate the availability heuristic in treated subjects and observe them making relatively optimistic assessments of the corporate announcements. We also find, empirically, that sophisticated investors appear aware of the mispricing. Finally, we evaluate risk, market frictions, and interactions with extant anomalies. This study is important because it sheds light on one of the most severe cases of mispricing (-10% future six-month returns), challenges the conventional wisdom held by market participants that SA announcements reflect good news, and informs investors and analysts about a behavioral heuristic they might unknowingly adopt.

Keywords: Asset Pricing; Stock Returns; Corporate Announcements; Market Efficiency; Mergers and Acquisitions; Behavioral Finance; Bounded Rationality; Corporate Disclosure

JEL Classification: G12, G14, G34, G41, M41

Suggested Citation

Rim, Hyun Jung and Zha Giedt, Jenny, Mistaking Bad News for Good News? M&A Optimism and Mispricing of Strategic Alternatives Announcements (December 5, 2023). Available at SSRN: https://ssrn.com/abstract=4322045 or http://dx.doi.org/10.2139/ssrn.4322045

Hyun Jung Rim

George Washington University ( email )

2121 I Street NW
Washington, DC 20052
United States

Jenny Zha Giedt (Contact Author)

George Washington University - School of Business ( email )

Washington, DC 20052
United States

HOME PAGE: http://www.jennyzha.com

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