Investor Attention and Merger Announcements

Abstract

This article analyzes investor attention around merger announcements and its impact on price reactions and investor trading activity. The authors find that (1) investor attention to target firms increases significantly during the preannouncement period, especially when merger-related news are present; (2) investor attention to both acquirer and target firms increases on the announcement day but increases more for the target firms and large deals; and (3) stock return and abnormal trading volume responses related to announcement are more pronounced when investor attention is higher. Overall, the results suggest that investors anticipate merger announcements and that investor attention affects how investors incorporate information into asset prices.

Keywords:

• Merger and acquisition
• Price efficiency
• Stock return
• Trading volume
• Investor attention

Notes

Acknowledgment

We thank Donald Byard, Lin Peng, Yi Tang, and Liuren Wu for helpful comments and suggestions. All errors remain our own.

Notes

1 For example, Wall Street has the phenomenon called “Merger Monday,” whereby hundreds of deals are announced at the beginning of a week.

2 The intuition is that when investors buy stocks, they search across thousands of them and often choose the one that catches their attention. When they sell, due to short sale constraints, they generally choose from the few stocks that they own.

3 691 firms are dropped in this stage.

4 145 firms are dropped in this process.

5 Share code disclosed in CRSP database is 10 or 11.

6 4939 stocks are dropped because of missing SVI, and 98 stocks are dropped because of tickers with generic meanings.

7 We start with 4030037 firm-day observations and 1151455 firm week-ends are excluded from the analysis. In untabulated results, we show that ASVI on weekends are -7.05% and -7.688% on Sundays and Saturday srespectively.

8 Following Betton, Eckbo, and Thorburn (2008), we start by downloading all mergers (form M), acquisition of majority interest (AM), acquisition of partial interest (AP), and acquisition of remaining interest (AR). I exclude all transactions classified as exchange offers, acquisition of assets, acquisition of certain assets, buybacks, recaps, and acquisition. To identify mergers and tender offers, I do the following: if the tender flag is “no” and the deal form is a merger, then the deal is a merger. If the tender flag is “yes,” then the deal is a tender offer.

9 The mean of ASVI on a weekday is 3.97% (median 2.04%). The mean (median) is larger than zero because when we construct ASVI, weekends are included to capture the baseline level of attention, but we exclude weekends in the actual analysis.

10 Since the T&A subsample is relatively small with 99 deals, our main analysis focuses on an expanded full sample.

11 It could be due to the lack of statistical power in a small sample of 99 deals.

12 The intuition is that when investors buy stocks, they search across thousands of them and often choose the one that catches their attention. When they sell, due to short sale constraints, they generally choose from the few stocks that they own.

13 The size and B/M breakpoints and returns of portfolios is obtained from Kenneth R. French’s website: http://mba.tuck.dartmouth.edu/pages/faculty/ken.french/data_library.html

14 Daily news pressure data for the period of 1968–2018 are available at: http://perseus.iies.su.se/∼dstro/. We thank David Strömberg for making the data available.

15 If the price continues to drift in the direction of the earnings surprise, it suggests an initial under-reaction and if it the price reverses in the following period, it suggests an initial over-reaction.

16 In untabulated results we verify CAR[2,30] and CAR[2,60] for each attention quartile. We find return reversal (negative returns) in all quartiles, with stronger reversal coming from high attention stocks. The difference is not significant though.