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Assimilation Effects in Financial Markets

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  • Fich, Eliezer M.
  • Xu, Guosong

Abstract

An assimilation bias occurs when people’s evaluative judgment is positively influenced by a previously observed signal. We study this effect by examining investors’ appraisal of M&A deals announced 1 day after other firms in the same 1-digit SIC as the merging parties release earnings surprises. Consistent with assimilation effects, acquirers’ M&A announcement stock return initially correlates with the previous day’s earnings surprises. This effect reverses after 1 week. Assimilation generates other distortions as more positive surprises are related to increases in bid competition, takeover premiums, and withdrawn M&As. Evidence from IPOs corroborates the presence of assimilation effects in financial markets.

Suggested Citation

  • Fich, Eliezer M. & Xu, Guosong, 2023. "Assimilation Effects in Financial Markets," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 58(7), pages 2890-2927, November.
    • Handle: RePEc:cup:jfinqa:v:58:y:2023:i:7:p:2890-2927_5
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