Uncertainty triggers overreaction: evidence from corporate takeovers

Black, E. L., Guo, J., Hu, N. and Vagenas-Nanos, E. (2017) Uncertainty triggers overreaction: evidence from corporate takeovers. European Journal of Finance, 23(14), pp. 1362-1389. (doi:10.1080/1351847X.2016.1202296)

[img]
Preview
Text
120238.pdf - Accepted Version

920kB

Abstract

Behavioural finance models suggest that under uncertainty, investors overweight their private information and overreact to it. We test this theoretical prediction in an M&A framework. We find that under high information uncertainty, when investors are more likely to possess firm-specific information, acquiring firms generate highly positive and significant gains following the announcement of private stock and private cash acquisitions (positive news) while the market heavily punishes public stock (negative news) deals. On the other hand, under conditions of low information uncertainty, when investors do not possess private information, the market reaction is complete (i.e. zero abnormal returns) irrespective of the type of acquisition. Overall, we provide empirical evidence that shows that information uncertainty plays a significant role in explaining short-run acquirer abnormal returns.

Item Type:Articles
Status:Published
Refereed:Yes
Glasgow Author(s) Enlighten ID:Hu, Dr Nan and Vagenas-Nanos, Dr Evangelos and Guo, Dr Jie
Authors: Black, E. L., Guo, J., Hu, N., and Vagenas-Nanos, E.
College/School:College of Social Sciences > Adam Smith Business School > Accounting and Finance
Journal Name:European Journal of Finance
Publisher:Routledge
ISSN:1351-847X
ISSN (Online):1466-4364
Published Online:04 July 2016
Copyright Holders:Copyright © 2016 Informa UK Limited, trading as Taylor and Francis Group
First Published:First published in European Journal of Finance 23(14):1362-1389
Publisher Policy:Reproduced in accordance with the copyright policy of the publisher

University Staff: Request a correction | Enlighten Editors: Update this record