The effect of media coverage on target firms’ trading activity and liquidity around domestic acquisition announcements: evidence from UK

ABSTRACT

This study investigates the effect of news media coverage on trading activity in, and the liquidity of, target firms’ shares around acquisition announcements. We use the number of articles published in four of the UK's main newspapers as a proxy for media coverage. Our dataset includes 350 UK domestic acquisition deals between 1996 and 2014. The results of our analysis suggest that media coverage is positively associated with target firms’ trading activity and stock liquidity. This is consistent with the media playing a key role in mitigating information asymmetry in the financial markets. This study contributes to the literature on stock market reactions to acquisition announcements by investigating the effect of media coverage on trading activity and stock liquidity beyond the price run-up, and by providing additional insights into the UK market which traditionally attracts less attention than the US market.

KEYWORDS:

• Mergers and acquisitions
• target firms
• trading activity
• media coverage
• information asymmetry
• stock liquidity

JEL classification codes:

• G14
• G34

Acknowledgement

The research work described in this paper was partially supported by the Irish Centre for Cloud Computing and Commerce, an Irish National Technology Centre funded by Enterprise Ireland and the Irish Industrial Development Authority, by the European Capital Markets Cooperative Research Center (ECMCRC), and by the Irish Institute of Digital Business. The authors would also like to thank the Editor (Prof. Chris Adcock), the two anonymous reviewers, and the attendees of the International Symposium in Finance 2019 and of the 2nd ECMCRC Workshop for their feedback.

Disclosure statement

No potential conflict of interest was reported by the author(s).

Notes

1 The UK Takeover Code (12th Ed.), Rule 1.

2 The UK Takeover Code (12th Ed.), Rule 2.1.

3 The UK Takeover Code (12th Ed.), Rule 20.1.

4 The UK Takeover Code (12th Ed.), Rule 2.8.

5 The Financial Services and Markets Act 2000, s. 118(2).

6 The Criminal Justice Act 1993, Section 52.

7 The Financial Services and Markets Act 2000, s. 118(3).

8 According to prior studies (Barbopoulos and Sudarsanam 2012; Monaco, Ibikunle, and Palumbo 2018), methods of payment have been categorised as follows: all-cash payment is equal to 1 when the consideration is 100% cash (0 otherwise); all-stock payment is equal to 1 when the consideration is 100% stock (0 otherwise); mixed payment is equal to 1 when the consideration is mixture of cash, stock and other methods of payment excluding earnout (0 otherwise); earnout is equal to 1 when the consideration includes earnout in addition to cash, stock or mixed payment (0 otherwise).

9 merg* OR acqui* OR target OR takeover OR rumour* OR buyout OR bid*.

10 This is somewhat unsurprising as we did not limit our analysis to the FT.

11 Excess volume (number of trades) was measured as the difference between the daily trading volume (number of trades) for each stock in the analysis period (i.e. −30;+10) minus the average daily trading volume (number of trades) for each stock in the estimation period (i.e. −250;−31).

12 Ding and Hou (2015) also adopt the amount of advertising spending as a measure of passive investor attention. Unfortunately, this information is not available for UK firms (Ali Shah and Akbar 2008) and therefore we cannot include this additional measure to our model.