Uncertainty Triggers Overreaction: Evidence from Corporate Takeovers

Black, E.L.; Guo, M.; Hu, N.; Vagenas-Nanos, E.

doi:10.1080/1351847x.2016.1202296

Uncertainty Triggers Overreaction: Evidence from Corporate Takeovers

Black, E.L.; Guo, M.; Hu, N.; Vagenas-Nanos, E.

Authors

E.L. Black

Professor Michael Guo jie.guo@durham.ac.uk
Professor

N. Hu

E. Vagenas-Nanos

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.

Citation

Black, E., Guo, M., Hu, N., & Vagenas-Nanos, E. (2017). Uncertainty Triggers Overreaction: Evidence from Corporate Takeovers. European Journal of Finance, 23(14), 1362-1389. https://doi.org/10.1080/1351847x.2016.1202296

Journal Article Type	Article
Acceptance Date	Jun 8, 2016
Online Publication Date	Jul 4, 2016
Publication Date	Nov 14, 2017
Deposit Date	Jun 22, 2016
Publicly Available Date	Jan 4, 2018
Journal	European Journal of Finance
Print ISSN	1351-847X
Electronic ISSN	1466-4364
Publisher	Taylor and Francis Group
Peer Reviewed	Peer Reviewed
Volume	23
Issue	14
Pages	1362-1389
DOI	https://doi.org/10.1080/1351847x.2016.1202296
Public URL	https://durham-repository.worktribe.com/output/1401880

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Copyright Statement
This is an Accepted Manuscript of an article published by Taylor & Francis Group in The European Journal of Finance on 04/07/2016, available online at: http://www.tandfonline.com/10.1080/1351847X.2016.1202296.