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)

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: Guo, Dr Jie and Vagenas-Nanos, Professor Evangelos and Hu, Dr Nan
• 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