Belief Asymmetry and Gains from Acquisitions

29 Pages Posted: 25 Jun 2007

See all articles by George Alexandridis

George Alexandridis

ICMA Centre, Henley Business School

Antonios Antoniou

Wealth Associates

Huainan Zhao

Loughborough University - School of Business and Economics

Date Written: June 1, 2007


The divergence of opinion 'premium hypothesis', developed by Miller (1977), predicts that the price of a stock is set by optimistic investors when belief asymmetry about its value is high. We examine whether this hypothesis can explain gains to acquiring firms. We find a significant positive relation between belief asymmetry and announcement returns to acquiring firms bidding for unlisted targets after accounting for various firm and deal characteristics. Yet, acquirers subject to high (low) belief asymmetry experience negative (no) abnormal returns in the post-acquisition period. Our evidence suggests that, in the presence of high belief asymmetry, optimistic investors overreact around acquisition announcements involving private targets that on average signal strong potential for value creation. This leads acquiring firms' prices to overshoot in the short-run and experience sharp corrections subsequently.

Keywords: divergence of opinion, overreaction, acquirer gains, private targets

JEL Classification: G14, G34

Suggested Citation

Alexandridis, George and Antoniou, Antonios and Zhao, Huainan, Belief Asymmetry and Gains from Acquisitions (June 1, 2007). Available at SSRN: or

George Alexandridis (Contact Author)

ICMA Centre, Henley Business School ( email )

Whiteknights Campus
P.O. Box 242
Reading, RG6 6BA
United Kingdom
+44 (0) 118 378 4387 (Phone)

Antonios Antoniou

Wealth Associates ( email )

Alpine House,
Honeypot Lane
London, NW9 9RX
United Kingdom

Huainan Zhao

Loughborough University - School of Business and Economics ( email )

Epinal Way
Leics LE11 3TU
United Kingdom

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