Investor Inattention and the Market Reaction to Merger Announcements

Louis, Henock; Sun, Amy X.

doi:10.1287/mnsc.1100.1212

Cited by 100 publications

(32 citation statements)

References 43 publications

(35 reference statements)

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“…For example, we observe a negative correlation between acquirer size and announcement returns (Kimbrough and Louis, 2011;Golubov et al, 2012), acquisitions with greater relative deal size have higher announcement returns (Louis and Sun, 2010), highly stock-financed deals are associated with lower announcement returns (Louis, 2005), announcement returns are higher in tender offers (Golubov et al, 2012;Cai and Sevilir, 2012), and deals in which the acquirer and the target are in different industries are associated with lower announcement returns (Morck et al, 1990).…”

Section: Multivariate Analysis -Common Auditors and Manda Qualitymentioning

confidence: 74%

Common auditors in M&A transactions

Cai

Kim

Park

et al. 2016

Journal of Accounting and Economics

144

103

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We examine merger and acquisition (M&A) transactions in which the acquirer and the target share a common auditor. We predict that a common auditor can help merging firms reduce uncertainty throughout the acquisition process, which allows managers to more efficiently allocate their capital, resulting in higher quality M&As. Consistent with our prediction, we find that deals with common auditors have higher acquisition announcement returns than do non-common-auditor deals. Further, we find that the common-auditor effect is more pronounced for deals with greater pre-acquisition uncertainty and deals involving acquirers and targets that are audited by the same local office of the common auditor. We also find that there is an increased probability of an M&A for firms with a common auditor. Collectively, our evidence suggests that common auditors act as information intermediaries for merging firms, resulting in higher quality acquisitions. Highlights• We examine merger and acquisition (M&A) transactions in which the acquirer and the target share a common auditor. • A common auditor helps merging firms reduce uncertainty, resulting in higher quality M&As. • Deals with common auditors have higher acquisition announcement returns than do non-common-auditor deals. • The common-auditor effect is more pronounced for deals with greater preacquisition uncertainty. • The common-auditor effect is more pronounced for deals involving the same local office of the common auditor. JEL Classification G34; M41; M49We thank Michelle Hanlon (the editor), an anonymous referee,

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Section: Multivariate Analysis -Common Auditors and Manda Qualitymentioning

confidence: 74%

Common auditors in M&A transactions

Cai

Kim

Park

et al. 2016

Journal of Accounting and Economics

144

103

View full text Add to dashboard Cite

show abstract

“…Therefore, if mispricing between the two assets (during the match) is due to cognitive limitations, it should be a result of constraints on our ability to process information, rather than constraints on our ability to receive information. Whereas there is some ambiguity in earlier limited attention studies as to whether traders failed to process the new information quickly, or simply did not receive the information (DellaVigna and Pollet, ; Hirshleifer et al., ; Louis and Sun, ), there should be no such ambiguity in this environment.…”

mentioning

confidence: 82%

“… There is a large recent empirical literature linking investor (in)attention to asset prices (Barber and Odean, ; Corwin and Coughenour, ; DellaVigna and Pollet, ; Hirshleifer et al ., , ; Louis and Sun, ; Da et al ., ; Chakrabarty and Moulton, ). …”

mentioning

confidence: 99%

Information Processing Constraints and Asset Mispricing

Brown

2013

The Economic Journal

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I analyse a series of natural quasi-experiments -centred on betting exchange data on the Wimbledon Tennis Championships -to determine whether information processing constraints are partially responsible for mispricing in asset markets. I find that the arrival of information during each match leads to substantial mispricing between two equivalent assets, and that part of this mispricing can be attributed to differences in the frequency with which the two prices are updated inplay. This suggests that information processing constraints force the periodic neglect of one of the assets, thereby causing substantial, albeit temporary, mispricing in this simple asset market.Traders are bombarded with information on the macroeconomy, industrial sectors and on individual firms. This information comes in a variety of forms: newspaper articles, blogs, tweets, meetings, broker phone calls and colleague's emails. Even if traders are attentive and receive all of this raw information, it is inevitable that they will be unable to process it effectively, to deduce the implications for all of the assets (including potential assets) in their portfolio. In this article, I investigate whether these information processing constraints have an effect on the level of mispricing in asset markets.I use a series of natural quasi-experiments centred on Betfair betting exchange data from the Men's Wimbledon Singles Tennis Championships of 2011 and 2012. Trading is conveniently divided between pre-match periods (when little or no information arrives) and so-called 'inplay' periods during the match (when information is arriving constantly). I hypothesise that the arrival of information means that traders' information processing constraints suddenly become binding. While before the match, bettors had time to assess and price the likelihood of, for example, a Roger Federer win and a 3-1 Roger Federer win, during the match they are unable to process the implications of new information for both these bets. Faced with this constraint, bettors may choose to update the value of the bet on Roger Federer to win rather than the bet on the specific score by which Federer will win. In other words, despite having all the necessary raw information to price both bets, information processing constraints may mean that the value of certain assets are not updated in a timely fashion, and therefore mispricing is temporarily observed.

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“…To measure abnormal trading volume, I follow DellaVigna and Pollet (), Hirshleifer et al. (), and Louis and Sun (). First, I take the log transformation of the market value of the shares traded ( LOG_VOLUME ).…”

Section: Target Non‐public Status and Acquirer Abnormal Trading Volumementioning

confidence: 99%

“…I use the log transformation of the market value of shares traded to be consistent with DellaVigna and Pollet (), Hirshleifer et al. (), and Louis and Sun (). However, I also use an alternative measure, which involves deflating the number of shares traded on a given day by the number of shares outstanding on that day (share turnover).…”

Section: Target Non‐public Status and Acquirer Abnormal Trading Volumementioning

confidence: 99%

Are Stock‐for‐Stock Acquirers of Unlisted Targets Really Less Overvalued?

Louis

2013

Financial Management

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Extant studies assume that targets’ private ownership mitigates acquirers’ incentives and opportunities to finance acquisitions with inflated stocks. This view stems from the observation that, although the average stock‐for‐stock acquirer's merger announcement return is negative when the target is listed, it is positive when the target is unlisted. Accordingly, extant studies often suggest that announcements of stock‐for‐stock acquisitions of unlisted targets convey favorable private information about the acquirers. However, an analysis of stock‐for‐stock acquirers’ stock performance, abnormal accruals, net operating assets, and insider trading suggests the opposite. Acquirers of unlisted targets are generally more overvalued than acquirers of listed targets.

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Investor Inattention and the Market Reaction to Merger Announcements

Cited by 100 publications

References 43 publications

Common auditors in M&A transactions

Common auditors in M&A transactions

Information Processing Constraints and Asset Mispricing

Are Stock‐for‐Stock Acquirers of Unlisted Targets Really Less Overvalued?

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