Merger Momentum and Investor Sentiment: The Stock Market Reaction to Merger Announcements

Abstract

This paper examines the effects of mergers on bidding firms' stock prices. We find evidence of merger momentum: bidder stock prices are more likely to increase when a merger is announced if recent mergers by other firms have been received well (a "hot" merger market) or if the overall stock market is doing better. However, there is long run reversal. Long-run bidder stock returns are lower for mergers announced when the either merger or stock markets were hot at the time of the merger than for those announced at other times.

Keywords: mergers, investor sentiment, long-run reaction, merger momentum, hot markets

JEL Classification: G34, G14