RETRACTED ARTICLE: Investor sentiment, stock market valuation and merger activity

Abstract

Using correlation analysis and Granger causality tests, we examine both the relationship between investor sentiment and quarterly merger activity and the relationship between stock market valuation and quarterly merger activity in the United States from 1984 to 2005 in order to analyze whether there is evidence consistent with the stock market driven acquisitions theory. Merger activity is split into stock, cash and mixed payment transactions and measured by number of transactions. The investor sentiment analysis supports all predictions of the stock market driven acquisitions theory, while the stock market valuation analysis supports the predictions of the stock market driven acquisitions theory only in majority. By conditioning our analysis on investor sentiment, we are able to provide some new information on the likelihood that behavioral arguments are supported by the data. To the best of our knowledge, this is the first paper investigating the relationship between investor sentiment and merger activity.