IDEAS home Printed from https://ideas.repec.org/a/eee/corfin/v78y2023ics0929119922001535.html
   My bibliography  Save this article

The informational consequences of good and bad mergers

Author

Listed:
  • Adra, Samer
  • Barbopoulos, Leonidas G.

Abstract

We study the information production dynamics in financial markets in response to Mergers and Acquisitions (M&As) announcements. We find that acquirers with low levels of pre-announcement stock price informativeness experience a substantial increase in their corresponding post-announcement stock price informativeness in response to positive Cumulative Abnormal Returns (CAR). We show that this increase is due to the enhanced prospect of deal completion. By contrast, high levels of acquirer pre-announcement stock price informativeness limit traders' incentives to search for, and acquire, new information. We also find that similar dynamics apply to the changes in acquirers' analyst coverage. Emphasizing the important role of information acquisition costs in influencing informed trading, a positive acquirer CAR increases the acquiring firm's post-announcement stock price informativeness in M&As involving public rather than private and subsidiary targets. Overall, we show that M&As have important informational consequences beyond their immediate effects on stock prices.

Suggested Citation

  • Adra, Samer & Barbopoulos, Leonidas G., 2023. "The informational consequences of good and bad mergers," Journal of Corporate Finance, Elsevier, vol. 78(C).
    • Handle: RePEc:eee:corfin:v:78:y:2023:i:c:s0929119922001535
    DOI: 10.1016/j.jcorpfin.2022.102310
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S0929119922001535
    Download Restriction: Full text for ScienceDirect subscribers only
    File URL: https://libkey.io/10.1016/j.jcorpfin.2022.102310?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Joos, Peter & Piotroski, Joseph D. & Srinivasan, Suraj, 2016. "Can analysts assess fundamental risk and valuation uncertainty? An empirical analysis of scenario-based value estimates," Journal of Financial Economics, Elsevier, vol. 121(3), pages 645-663.
    2. Adra, Samer & Barbopoulos, Leonidas G., 2018. "The valuation effects of investor attention in stock-financed acquisitions," Journal of Empirical Finance, Elsevier, vol. 45(C), pages 108-125.
    3. Grossman, Sanford J & Stiglitz, Joseph E, 1980. "On the Impossibility of Informationally Efficient Markets," American Economic Review, American Economic Association, vol. 70(3), pages 393-408, June.
    4. Sara B. Moeller & Frederik P. Schlingemann & René M. Stulz, 2005. "Wealth Destruction on a Massive Scale? A Study of Acquiring‐Firm Returns in the Recent Merger Wave," Journal of Finance, American Finance Association, vol. 60(2), pages 757-782, April.
    5. Nguyen, Nam H. & Phan, Hieu V., 2017. "Policy Uncertainty and Mergers and Acquisitions," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 52(2), pages 613-644, April.
    6. Officer, Micah S., 2007. "The price of corporate liquidity: Acquisition discounts for unlisted targets," Journal of Financial Economics, Elsevier, vol. 83(3), pages 571-598, March.
    7. Art Durnev & Randall Morck & Bernard Yeung, 2004. "Value-Enhancing Capital Budgeting and Firm-specific Stock Return Variation," Journal of Finance, American Finance Association, vol. 59(1), pages 65-105, February.
    8. James Dow & Itay Goldstein & Alexander Guembel, 2017. "Incentives for Information Production in Markets where Prices Affect Real Investment," Journal of the European Economic Association, European Economic Association, vol. 15(4), pages 877-909.
    9. Qi Chen & Itay Goldstein & Wei Jiang, 2007. "Price Informativeness and Investment Sensitivity to Stock Price," Review of Financial Studies, Society for Financial Studies, vol. 20(3), pages 619-650.
    10. Chen, Deqiu & Ma, Yujing & Martin, Xiumin & Michaely, Roni, 2022. "On the fast track: Information acquisition costs and information production," Journal of Financial Economics, Elsevier, vol. 143(2), pages 794-823.
    11. Charles Cao & Zhiwu Chen & John M. Griffin, 2005. "Informational Content of Option Volume Prior to Takeovers," The Journal of Business, University of Chicago Press, vol. 78(3), pages 1073-1109, May.
    12. Yan, Yuxing & Zhang, Shaojun, 2014. "Quality of PIN estimates and the PIN-return relationship," Journal of Banking & Finance, Elsevier, vol. 43(C), pages 137-149.
    13. Michael J. Brennan & Sahn-Wook Huh & Avanidhar Subrahmanyam, 2018. "High-Frequency Measures of Informed Trading and Corporate Announcements," Review of Financial Studies, Society for Financial Studies, vol. 31(6), pages 2326-2376.
    14. Barbopoulos, Leonidas G. & Adra, Samer & Saunders, Anthony, 2020. "Macroeconomic news and acquirer returns in M&As: The impact of investor alertness," Journal of Corporate Finance, Elsevier, vol. 64(C).
    15. Paul André & Maher Kooli & Jean-François L’Her, 2004. "The Long-Run Performance of Mergers and Acquisitions: Evidence from the Canadian Stock Market," Financial Management, Financial Management Association, vol. 33(4), Winter.
    16. Dow, James & Gorton, Gary, 1997. "Stock Market Efficiency and Economic Efficiency: Is There a Connection?," Journal of Finance, American Finance Association, vol. 52(3), pages 1087-1129, July.
    17. Micah S. Officer & Annette B. Poulsen & Mike Stegemoller, 2009. "Target-firm information asymmetry and acquirer returns," Review of Finance, European Finance Association, vol. 13(3), pages 467-493.
    18. Artyom Durnev & Randall Morck & Bernard Yeung & Paul Zarowin, 2003. "Does Greater Firm‐Specific Return Variation Mean More or Less Informed Stock Pricing?," Journal of Accounting Research, Wiley Blackwell, vol. 41(5), pages 797-836, December.
    19. Avanidhar Subrahmanyam & Sheridan Titman, 1999. "The Going‐Public Decision and the Development of Financial Markets," Journal of Finance, American Finance Association, vol. 54(3), pages 1045-1082, June.
    20. Aslan, Hadiye & Easley, David & Hvidkjaer, Soeren & O'Hara, Maureen, 2011. "The characteristics of informed trading: Implications for asset pricing," Journal of Empirical Finance, Elsevier, vol. 18(5), pages 782-801.
    21. Yuanzhi Luo, 2005. "Do Insiders Learn from Outsiders? Evidence from Mergers and Acquisitions," Journal of Finance, American Finance Association, vol. 60(4), pages 1951-1982, August.
    22. J H Venter & D C J de Jongh, 2006. "Extending The Ekop Model To Estimate The Probability Of Informed Trading," Studies in Economics and Econometrics, Taylor & Francis Journals, vol. 30(2), pages 1-15, August.
    23. Kyle, Albert S, 1985. "Continuous Auctions and Insider Trading," Econometrica, Econometric Society, vol. 53(6), pages 1315-1335, November.
    24. Shiu‐Sheng Chen, 2007. "Does Monetary Policy Have Asymmetric Effects on Stock Returns?," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 39(2‐3), pages 667-688, March.
    25. Tor-Erik Bakke & Toni M. Whited, 2010. "Which Firms Follow the Market? An Analysis of Corporate Investment Decisions," Review of Financial Studies, Society for Financial Studies, vol. 23(5), pages 1941-1980.
    26. Paul Draper & Krishna Paudyal, 2006. "Acquisitions: Private versus Public," European Financial Management, European Financial Management Association, vol. 12(1), pages 57-80, January.
    27. Jeffry Netter & Mike Stegemoller & M. Babajide Wintoki, 2011. "Implications of Data Screens on Merger and Acquisition Analysis: A Large Sample Study of Mergers and Acquisitions from 1992 to 2009," Review of Financial Studies, Society for Financial Studies, vol. 24(7), pages 2316-2357.
    28. Samer Adra & Leonidas G. Barbopoulos, 2019. "Liquidity and information asymmetry considerations in corporate takeovers," The European Journal of Finance, Taylor & Francis Journals, vol. 25(7), pages 724-743, May.
    29. Laurent Fresard, 2012. "Cash Savings and Stock Price Informativeness," Review of Finance, European Finance Association, vol. 16(4), pages 985-1012.
    30. Hassan Tehranian & Mengxing Zhao & Julie L. Zhu, 2014. "Can Analysts Analyze Mergers?," Management Science, INFORMS, vol. 60(4), pages 959-979, April.
    31. Gilles Hilary & Charles Hsu, 2013. "Analyst Forecast Consistency," Journal of Finance, American Finance Association, vol. 68(1), pages 271-297, February.
    32. Randall Morck & Andrei Shleifer & Robert W. Vishny, 1990. "The Stock Market and Investment: Is the Market a Sideshow?," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 21(2), pages 157-216.
    33. Strobl, Günter, 2014. "Stock-based managerial compensation, price informativeness, and the incentive to overinvest," Journal of Corporate Finance, Elsevier, vol. 29(C), pages 594-606.
    34. Wenjing Ouyang & Samuel H. Szewczyk, 2018. "Stock price informativeness on the sensitivity of strategic M&A investment to Q," Review of Quantitative Finance and Accounting, Springer, vol. 50(3), pages 745-774, April.
    35. Baruch, Shmuel & Panayides, Marios & Venkataraman, Kumar, 2017. "Informed trading and price discovery before corporate events," Journal of Financial Economics, Elsevier, vol. 125(3), pages 561-588.
    36. Travis L. Johnson & Eric C. So, 2018. "A Simple Multimarket Measure of Information Asymmetry," Management Science, INFORMS, vol. 64(3), pages 1055-1080, March.
    37. Li, Jun & Yu, Jianfeng, 2012. "Investor attention, psychological anchors, and stock return predictability," Journal of Financial Economics, Elsevier, vol. 104(2), pages 401-419.
    38. Aktas, Nihat & de Bodt, Eric & Declerck, Fany & Van Oppens, Herve, 2007. "The PIN anomaly around M&A announcements," Journal of Financial Markets, Elsevier, vol. 10(2), pages 169-191, May.
    39. AKTAS, Nihat & DE BODT, Eric & DECLERCK, Fany & VAN OPPENS, Hervé, 2007. "The PIN anomaly around M&A announcements," LIDAM Reprints CORE 1965, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
    40. Ang, James & Kohers, Ninon, 2001. "The Take-Over Market for Privately Held Companies: The US Experience," Cambridge Journal of Economics, Oxford University Press, vol. 25(6), pages 723-748, November.
    41. Datar, Srikant & Frankel, Richard & Wolfson, Mark, 2001. "Earnouts: The Effects of Adverse Selection and Agency Costs on Acquisition Techniques," The Journal of Law, Economics, and Organization, Oxford University Press, vol. 17(1), pages 201-238, April.
    42. Laurent Fresard, 2012. "Cash Savings and Stock Price Informativeness," Post-Print hal-01053586, HAL.
    43. Barbopoulos, Leonidas G. & Adra, Samer, 2016. "The earnout structure matters: Takeover premia and acquirer gains in earnout financed M&As," International Review of Financial Analysis, Elsevier, vol. 45(C), pages 283-294.
    44. Somnath Das & Re‐Jin Guo & Huai Zhang, 2006. "Analysts' Selective Coverage and Subsequent Performance of Newly Public Firms," Journal of Finance, American Finance Association, vol. 61(3), pages 1159-1185, June.
    45. Saeyoung Chang, 1998. "Takeovers of Privately Held Targets, Methods of Payment, and Bidder Returns," Journal of Finance, American Finance Association, vol. 53(2), pages 773-784, April.
    46. Roll, Richard & Schwartz, Eduardo & Subrahmanyam, Avanidhar, 2010. "O/S: The relative trading activity in options and stock," Journal of Financial Economics, Elsevier, vol. 96(1), pages 1-17, April.
    47. Stefano Giglio & Kelly Shue, 2014. "Editor's Choice No News Is News: Do Markets Underreact to Nothing?," Review of Financial Studies, Society for Financial Studies, vol. 27(12), pages 3389-3440.
    48. Kau, James B. & Linck, James S. & Rubin, Paul H., 2008. "Do managers listen to the market?," Journal of Corporate Finance, Elsevier, vol. 14(4), pages 347-362, September.
    49. McNichols, M & O'Brien, PC, 1997. "Self-selection and analyst coverage," Journal of Accounting Research, Wiley Blackwell, vol. 35, pages 167-199.
    50. Bradley, Daniel & Gokkaya, Sinan & Liu, Xi & Xie, Fei, 2017. "Are all analysts created equal? Industry expertise and monitoring effectiveness of financial analysts," Journal of Accounting and Economics, Elsevier, vol. 63(2), pages 179-206.
    51. Morck, Randall & Shleifer, Andrei & Vishny, Robert W, 1990. "The Stock Market Investments: Is the Market a Sideshow?," Scholarly Articles 30747157, Harvard University Department of Economics.
    52. Kathleen Fuller & Jeffry Netter & Mike Stegemoller, 2002. "What Do Returns to Acquiring Firms Tell Us? Evidence from Firms That Make Many Acquisitions," Journal of Finance, American Finance Association, vol. 57(4), pages 1763-1793, August.
    53. Yu, Fang (Frank), 2008. "Analyst coverage and earnings management," Journal of Financial Economics, Elsevier, vol. 88(2), pages 245-271, May.
    54. Golubov, Andrey & Yawson, Alfred & Zhang, Huizhong, 2015. "Extraordinary acquirers," Journal of Financial Economics, Elsevier, vol. 116(2), pages 314-330.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Pereira da Silva, Paulo, 2021. "Do managers pay attention to the market? A review of the relationship between stock price informativeness and investment," Journal of Multinational Financial Management, Elsevier, vol. 59(C).
    2. Adra, Samer & Barbopoulos, Leonidas G., 2020. "Do corporations learn from mispricing? Evidence from takeovers and corporate performance," International Review of Financial Analysis, Elsevier, vol. 68(C).
    3. Xu, Liang, 2021. "Stock price informativeness and managerial inefficiency," International Review of Economics & Finance, Elsevier, vol. 74(C), pages 348-364.
    4. De Cesari, Amedeo & Huang-Meier, Winifred, 2015. "Dividend changes and stock price informativeness," Journal of Corporate Finance, Elsevier, vol. 35(C), pages 1-17.
    5. Barbopoulos, Leonidas G. & Adra, Samer & Saunders, Anthony, 2020. "Macroeconomic news and acquirer returns in M&As: The impact of investor alertness," Journal of Corporate Finance, Elsevier, vol. 64(C).
    6. Aktas, Nihat & Cousin, Jean-Gabriel & Ozdakak, Ali & Zhang, Junyao, 2016. "Industry IPOs, growth opportunities, and private target acquisitions," Journal of Corporate Finance, Elsevier, vol. 37(C), pages 193-209.
    7. Nyborg, Kjell & Wang, Zexi, 2013. "Stock Liquidity and Corporate Cash Holdings," CEPR Discussion Papers 9535, C.E.P.R. Discussion Papers.
    8. Adra, Samer & Barbopoulos, Leonidas G. & Saunders, Anthony, 2020. "The impact of monetary policy on M&A outcomes," Journal of Corporate Finance, Elsevier, vol. 62(C).
    9. Abdallah, Abed AL-Nasser & Abdallah, Wissam, 2019. "Does cross-listing in the US improve investment efficiency? Evidence from UK firms," The Quarterly Review of Economics and Finance, Elsevier, vol. 72(C), pages 215-231.
    10. Leonidas G. Barbopoulos & Jo Danbolt, 2021. "The real effects of earnout contracts in M&As," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, vol. 44(3), pages 607-639, September.
    11. Fujun Lai & Qian Wang & Qingxiang Feng, 2019. "Does Chinese Financial Market Information Promote Listed Manufacturing Firms’ Productivity?," Sustainability, MDPI, vol. 11(2), pages 1-20, January.
    12. Boleslavsky, Raphael & Kelly, David L. & Taylor, Curtis R., 2017. "Selloffs, bailouts, and feedback: Can asset markets inform policy?," Journal of Economic Theory, Elsevier, vol. 169(C), pages 294-343.
    13. Wenjing Ouyang & Samuel H. Szewczyk, 2018. "Stock price informativeness on the sensitivity of strategic M&A investment to Q," Review of Quantitative Finance and Accounting, Springer, vol. 50(3), pages 745-774, April.
    14. Bennett, Benjamin & Stulz, René & Wang, Zexi, 2020. "Does the stock market make firms more productive?," Journal of Financial Economics, Elsevier, vol. 136(2), pages 281-306.
    15. Itay Goldstein, 2023. "Information in Financial Markets and Its Real Effects," Review of Finance, European Finance Association, vol. 27(1), pages 1-32.
    16. Abedifar, Pejman & Bouslah, Kais & Qamhieh Hashem, Shatha & Song, Liang, 2020. "How informative are stock prices of Islamic Banks?," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 66(C).
    17. Chang, Eric C. & Lin, Tse-Chun & Ma, Xiaorong, 2020. "Governance through trading on acquisitions of public firms," Journal of Corporate Finance, Elsevier, vol. 65(C).
    18. Ben-Nasr, Hamdi & Alshwer, Abdullah A., 2016. "Does stock price informativeness affect labor investment efficiency?," Journal of Corporate Finance, Elsevier, vol. 38(C), pages 249-271.
    19. Thierry Foucault & Laurent Frésard, 2012. "Cross-Listing, Investment Sensitivity to Stock Price, and the Learning Hypothesis," The Review of Financial Studies, Society for Financial Studies, vol. 25(11), pages 3305-3350.
    20. Thierry Foucault & Laurent Fresard, 2019. "Corporate Strategy, Conformism, and the Stock Market," Review of Financial Studies, Society for Financial Studies, vol. 32(3), pages 905-950.

    More about this item

    Keywords

    Stock price informativeness; Endogenous information production; Mergers and acquisitions; Analyst coverage;
    All these keywords.

    JEL classification:

    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies
    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:corfin:v:78:y:2023:i:c:s0929119922001535. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Catherine Liu (email available below). General contact details of provider: http://www.elsevier.com/locate/jcorpfin .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.