Hostname: page-component-586b7cd67f-dsjbd Total loading time: 0 Render date: 2024-12-04T10:15:57.980Z Has data issue: false hasContentIssue false
  • English
  • Français

Assimilation Effects in Financial Markets

Published online by Cambridge University Press:  11 October 2022

Eliezer M. Fich  and
Guosong Xu Open the ORCID record for Guosong Xu [Opens in a new window]
Eliezer M. Fich
Affiliation:
Drexel University LeBow College of Business [email protected]
Guosong Xu*
Affiliation:
Erasmus University Rotterdam School of Management
*
[email protected] (corresponding author)
Rights & Permissions [Opens in a new window]

Abstract

Core share and HTML view are not available for this content. However, as you have access to this content, a full PDF is available via the ‘Save PDF’ action button.

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other distortions as more positive surprises are related to increases in bid competition, takeover premiums, and withdrawn M&As.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.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 58 , Issue 7 , November 2023 , pp. 2890 - 2927
Creative Commons
Creative Common License - CCCreative Common License - BY
This is an Open Access article, distributed under the terms of the Creative Commons Attribution licence (https://creativecommons.org/licenses/by/4.0), which permits unrestricted re-use, distribution and reproduction, provided the original article is properly cited.
Copyright
© The Author(s), 2022. Published by Cambridge University Press on behalf of the Michael G. Foster School of Business, University of Washington

Footnotes

For helpful comments we thank Yakov Amihud, Nihat Aktas, Gennaro Bernile, Bruce Carlin, Cláudia Custódio, Lauren Cohen, Casey Dougal, Daniel Dorn, Ran Duchin, Joey Engelberg, Denis Gromb, Sam Hartzmark (discussant), Zoran Ivkovich, Philip Joos, Stephen Karolyi, Markku Kaustia, Alok Kumar, Fangyuan Ma (the referee), Paul Malatesta (the editor), Adrien Matray, Micah Officer, Chris Parsons, Farzad Saidi, Daniel Schmidt, David Yermack, Burcin Yurtoglu, and participants in seminars at Cheung Kong Graduate School of Business, the City University of Hong Kong, Erasmus University, ESSEC Business School, Frankfurt School of Finance & Management, Humboldt-Universität zu Berlin, Louisiana State University, Peking University (Guanghua), University of Lille II, University of Miami, University of Missouri, UNLV, and session attendees to the 2018 Research in Behavioral Finance Conference in Amsterdam, and the 2019 AFA meetings in Atlanta. All errors are our responsibility. A previous version of this paper was titled “Are Market Reactions to M&As Biased by Over-Extrapolation of Salient News?”

References

Ahern, K. R. “Bargaining Power and Industry Dependence in Mergers.” Journal of Financial Economics, 103 (2012), 530–50.Google Scholar
Andonov, A., and Rauh, J. D.. “The Return Expectations of Institutional Investors.” Stanford University Graduate School of Business Research Paper No. 18-5 (2020).Google Scholar
Bailey, W.; Kumar, A.; and Ng, D.. “Behavioral Biases of Mutual Fund Investors.” Journal of Financial Economics, 102 (2011), 1–27.CrossRefGoogle Scholar
Baker, M.; Pan, X.; and Wurgler, J.. “The Effect of Reference Point Prices on Mergers and Acquisitions.” Journal of Financial Economics, 106 (2012), 49–71.Google Scholar
Barber, B., and Odean, T.. “All That Glitters: The Effect of Attention and News on the Buying Behavior of Individual and Institutional Investors.” Review of Financial Studies, 21 (2008), 785–818.CrossRefGoogle Scholar
Barber, B., and Odean, T., “The Behavior of Individual Investors.” In Handbook of the Economics of Finance, Vol. 2. North-Holland: Elsevier (2013).Google Scholar
Barberis, N.; Greenwood, R.; Jin, L.; and Shleifer, A.. “Extrapolation and Bubbles.” Journal of Financial Economics, 129 (2018), 203–227.CrossRefGoogle Scholar
Bargeron, L.; Schlingermann, F.P.; Stulz, R. M.; and Zutter, C. J.. “Are Acquisition Premiums Lower Because of Target CEOs’ Conflicts of Interest?” Working Paper, available at https://papers.ssrn.com/sol3/papers.cfm?abstract_id=1593652 (2010).Google Scholar
Betton, S.; Eckbo, B. E.; and Thorburn, K. S., “Corporate Takeovers.” In Handbook of Corporate Finance, Empirical Corporate Finance, Vol. 2, Eckbo, B. E., ed. North-Holland: Elsevier (2008).Google Scholar
Bhargava, S., and Fisman, R.. “Contrast Effects in Sequential Decisions: Evidence from Speed Dating.” Review of Economics and Statistics, 96 (2014), 444–457.CrossRefGoogle Scholar
Bless, H., and Burger, A. M.. “Assimilation and Contrast in Social Priming.” Current Opinion in Psychology, 12 (2016), 26–31.CrossRefGoogle Scholar
Bless, H., and Schwarz, N.. “Mental Construal and the Emergence of Assimilation and Contrast Effects: The Inclusion/Exclusion Model.” Advances in Experimental Social Psychology, 42 (2010), 319–373.CrossRefGoogle Scholar
Bordalo, P.; Gennaioli, N.; and Shleifer, A.. “Salience Theory of Choice under Risk.” Quarterly Journal of Economics, 127 (2012), 1243–1285.CrossRefGoogle Scholar
Bordalo, P.; Gennaioli, N.; and Shleifer, A.. “Salience and Asset Prices.” American Economic Review, 103 (2013a), 623–628.Google Scholar
Bordalo, P.; Gennaioli, N.; and Shleifer, A.. “Salience and Consumer Choice.” Journal of Political Economy, 121 (2013b), 803–843.CrossRefGoogle Scholar
Bordalo, P.; Gennaioli, N.; and Shleifer, A.. “Memory, Attention and Choice.” Quarterly Journal of Economics, 135 (2020), 1399–1442.CrossRefGoogle Scholar
Cai, Y., and Sevilir, M.. “Board Connections and M&a Transactions.” Journal of Financial Economics, 103 (2012), 327–349.CrossRefGoogle Scholar
Carhart, M. M. “On Persistence in Mutual Fund Performance.” Journal of Finance, 52 (1997), 57–82.CrossRefGoogle Scholar
Chen, J.; Hong, H.; and Stein, J. C.. “Breadth of Ownership and Stock Returns.” Journal of Financial Economics, 66 (2002), 171–205.CrossRefGoogle Scholar
Chen, D.; Moskowitz, T. J.; and Shue, K.. “Decision Making Under the Gambler’s Fallacy: Evidence from Asylum Judges, Loan Officers, and Baseball Umpires.” Quarterly Journal of Economics, 131 (2016), 1181–242.CrossRefGoogle Scholar
Chow, G. “Tests of Equality Between Sets of Coefficients in Two Linear Regressions.” Econometrica, 28 (1960), 591–605.CrossRefGoogle Scholar
Cosemans, M., and Frehen, R.. “Salience Theory and Stock Prices: Empirical Evidence.” Journal of Financial Economics, 140 (2021), 460–483.CrossRefGoogle Scholar
Dasgupta, S.; Harford, J.; and Ma, F.. “EPS-Sensitivity and Mergers.” Working Paper, available at https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3317922 (2020).CrossRefGoogle Scholar
De Bondt, W. F. M., and Thaler, R.. “Does the Stock Market Overreact?“ Journal of Finance, 40 (1985), 793–805.CrossRefGoogle Scholar
DellaVigna, S. “Psychology and Economics: Evidence from the Field.” Journal of Economic Literature, 47 (2009), 315–372.CrossRefGoogle Scholar
DellaVigna, S., and Pollet, J. M.. “Demographics and Industry Returns.” American Economic Review, 97 (2007), 1667–1702.CrossRefGoogle Scholar
DellaVigna, S., and Pollet, J. M.. “Investor Inattention and Friday Earnings Announcements.” Journal of Finance, 64 (2009), 709–749.CrossRefGoogle Scholar
Dutordoir, M.; Strong, N. C.; and Sun, P.. “Does Short-Selling Potential Influence Mergers and Acquisitions Payment Choice?“ Journal of Financial Economics, 144 (2022), 761–779.CrossRefGoogle Scholar
Erel, I.; Liao, R. C.; and Weisbach, M. S.. “Determinants of Cross-Border Mergers and Acquisitions.” Journal of Finance, 67 (2012), 1045–1082.CrossRefGoogle Scholar
Ertan, A.; Karolyi, S. A.; Kelly, P.; and Stoumbos, R. C.. “Earnings Announcement Return Extrapolation.” Review of Accounting Studies, 27 (2022), 185–230.CrossRefGoogle Scholar
Fich, E. M.; Rice, E. M.; and Tran, A. L.. “Contractual Revisions in Compensation: Evidence from Merger Bonuses to Target CEOs.” Journal of Accounting and Economics, 61 (2016), 338–368.CrossRefGoogle Scholar
Förster, J.; Liberman, N.; and Kuschel, S.. “The Effect of Global Versus Local Processing Styles on Assimilation Versus Contrast in Social Judgment.” Journal of Personality and Social Psychology, 94 (2008), 579–599.CrossRefGoogle ScholarPubMed
Foster, G. “Intra-Industry Information Transfers Associated with Earnings Releases.” Journal of Accounting and Economics, 3 (1981), 201–232.Google Scholar
Frydman, C., and Wang, B.. “The Impact of Salience on Investor Behavior: Evidence from a Natural Experiment.” Journal of Finance, 75 (2019), 229–276.CrossRefGoogle Scholar
Fuller, K.; Netter, J.; and Stegemoller, M.. “What Do Returns to Acquiring Firms Tell Us? Evidence from Firms that Make Many Acquisitions.” Journal of Finance, 57 (2002), 1763–1793.CrossRefGoogle Scholar
Garvey, G.; Milbourn, T.; and Xie, K.. “What Will It Do for my EPS? An Unflattering but Powerful Motive for Mergers.” Working Paper, available at https://papers.ssrn.com/sol3/papers.cfm?abstract_id=1620544 (2013).Google Scholar
Gaspar, J.; Lescourret, L.; and Wang, S.. “Why Do Firms Bundle Earnings and Acquisition Announcements?” Working Paper, available at https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3072286 (2020).Google Scholar
Gaspar, J.; Massa, M.; and Matos, P.. “Shareholder Investment Horizons and the Market for Corporate Control.” Journal of Financial Economics, 76 (2005), 135–165.CrossRefGoogle Scholar
Giglio, S., and Shue, K.. “No News Is News: Do Markets Underreact to Nothing?” Review of Financial Studies, 27 (2014), 3389–3440.CrossRefGoogle Scholar
Gong, G.; Louis, H.; and Sun, A. X.. “Earnings Management, Lawsuits, and Stock-for-Stock Acquirers’ Market Performance.” Journal of Accounting and Economics, 46 (2008), 62–77.CrossRefGoogle Scholar
Gorton, G.; Kahl, M.; and Rosen, R. J.. “Eat or be Eaten: A Theory of Mergers and Firm Size.” Journal of Finance, 64 (2009), 1291–1344.CrossRefGoogle Scholar
Graham, J. R.; Hanlon, M.; Shevlin, T. J.; and Shroff, N.. “Tax Rates and Corporate Decision Making.” Review of Financial Studies, 30 (2017), 3128–3175.CrossRefGoogle Scholar
Greenwood, R., and Shleifer, A.. “Expectations of Returns and Expected Returns.” Review of Financial Studies, 27 (2014), 714–746.CrossRefGoogle Scholar
Harford, J.; Humphery-Jenner, M.; and Powell, R.. “The Sources of Value Destruction in Acquisitions by Entrenched Managers.” Journal of Financial Economics, 106 (2012), 247–261.CrossRefGoogle Scholar
Hartzmark, S. M. “The Worst, the Best, Ignoring all the Rest: The Rank Effect and Trading Behavior.” Review of Financial Studies, 28 (2015), 1024–1059.CrossRefGoogle Scholar
Hartzmark, S. M., and Shue, K.. “A Tough Act to Follow: Contrast Effects in Financial Markets.” Journal of Finance, 73 (2018), 1567–1613.CrossRefGoogle Scholar
Healy, P. M.; Palepu, K. G.; and Ruback, R. S.. “Does Corporate Performance Improve After Mergers?“ Journal of Financial Economics, 31 (1992), 135–175.CrossRefGoogle Scholar
Hirshleifer, D. “Investor Psychology and Asset Pricing.” Journal of Finance, 56 (2001), 1533–1597.Google Scholar
Hirshleifer, D.; Li, J.; and Yu, J.. “Asset Pricing with Extrapolative Expectations and Production.” Journal of Monetary Economics, 76 (2015), 87–106.CrossRefGoogle Scholar
Janiszewski, C., and Wyer, R. S.. “Content and Process Priming: A Review.” Journal of Consumer Psychology, 24 (2014), 96–118.Google Scholar
Jiang, Y.; Cho, A.; and Adaval, R.. “The Unique Consequences of Feeling Lucky: Implications for Consumer Behavior.” Journal of Consumer Psychology, 19 (2009), 171–184.CrossRefGoogle Scholar
Johnson, T. L., and So, E. C.. “Time Will Tell: Information in the Timing of Scheduled Earnings News.” Journal of Financial and Quantitative Analysis, 53 (2018), 2431–2464.CrossRefGoogle Scholar
Kahneman, D., and Tversky, A.. “Prospect Theory: An Analysis of Decisions under Risk.” Econometrica, 47 (1979), 263–292.CrossRefGoogle Scholar
Kumar, A. “Hard-to-Value Stocks, Behavioral Biases, and Informed Trading.” Journal of Financial and Quantitative Analysis, 44 (2009), 1375–1401.CrossRefGoogle Scholar
Lehn, K. M., and Zhao, M.. “CEO Turnover After Acquisitions: Are Bad Bidders Fired?“ Journal of Finance, 6 (2006), 1759–1811.CrossRefGoogle Scholar
Liu, X., and Ritter, J.. “Local Underwriter Oligopolies and IPO Underpricing.” Journal of Financial Economics, 102 (2011), 579–601.CrossRefGoogle Scholar
Louis, H., and Sun, A.. “Investor Inattention and the Market Reaction to Merger Announcements.” Management Science, 56 (2010), 1781–1793.CrossRefGoogle Scholar
Lowry, M., and Shu, S.. “Litigation Risk and IPO Underpricing.” Journal of Financial Economics, 65 (2002), 309–335.CrossRefGoogle Scholar
Luo, Y. “Do Insiders Learn from Outsiders? Evidence from Mergers and Acquisitions.” Journal of Finance, 60 (2005), 1951–1982.CrossRefGoogle Scholar
Ma, Q.; Whidbee, D.; and Zhang, W.. “Acquirer Reference Prices and Acquisition Performance.” Journal of Financial Economics, 132 (2019), 175–199.CrossRefGoogle Scholar
Malmendier, U., and Tate, G.. “Who Makes Acquisitions? CEO Overconfidence and the Market’s Reaction.” Journal of Financial Economics, 89 (2008), 20–43.CrossRefGoogle Scholar
Masulis, R. W.; Wang, C.; and Xie, F.. “Corporate Governance and Acquirer Returns.” Journal of Finance, 62 (2007), 1851–1889.CrossRefGoogle Scholar
McQueen, G.; Pinegar, M.; and Thorley, S.. “Delayed Reaction to Good News and the Cross Autocorrelation of Portfolio Returns.” Journal of Finance, 51 (1996), 889–919.Google Scholar
Officer, M. S. “Termination Fees in Mergers and Acquisitions.” Journal of Financial Economics, 69 (2003), 431–467.CrossRefGoogle Scholar
Rabin, M., and Vayanos, D.. “The Gambler’s and Hot-Hand Fallacies: Theory and Applications.” Review of Economic Studies, 77 (2010), 730–778.CrossRefGoogle Scholar
Rau, P. R. “Investment Bank Market Share, Contingent Fee Payments, and the Performance of Acquiring Firms.” Journal of Financial Economics, 56 (2000), 293–324.Google Scholar
Rau, P. R., and Vermaelen, T.. “Glamour, Value and the Post-Acquisition Performance of Acquiring Firms.” Journal of Financial Economics, 49 (1998), 223–253.Google Scholar
Schwert, G. “Markup Pricing in Mergers and Acquisitions.” Journal of Financial Economics, 41 (1996), 153–192.CrossRefGoogle Scholar
Shalev, R. “Managerial Discretion in Business Combinations Reporting Under SFAS 141.” Unpublished Doctoral Dissertation, Columbia University (2007).Google Scholar
Shleifer, A., and Vishny, R. W.. “Stock Market Driven Acquisitions.” Journal of Financial Economics, 70 (2003), 295–311.CrossRefGoogle Scholar
Srull, T. K., and Wyer, R. S.. “The Role of Category Accessibility in the Interpretation of Information about Persons: Some Determinants and Implications.” Journal of Personality and Social Psychology, 37 (1979), 1660–1672.CrossRefGoogle Scholar
Taylor, S. E. “Asymmetrical Effects of Positive and Negative Events: The Mobilization-Minimization Hypothesis.” Psychological Bulletin, 110 (1991), 67–85.CrossRefGoogle ScholarPubMed
Tetlock, P. C. “Giving Content to Investor Sentiment: The Role of Media in the Stock Market.” Journal of Finance, 62 (2007), 1139–1168.CrossRefGoogle Scholar
Thomas, J., and Zhang, F.. “Overreaction to Intra-Industry Information Transfers?” Journal of Accounting Research, 46 (2008), 909–940.CrossRefGoogle Scholar
Tversky, A., and Kahneman, D.. “Availability: A Heuristic for Judging Frequency and Probability.” Cognitive Psychology, 5 (1973), 207–232.CrossRefGoogle Scholar
Tversky, A., and Kahneman, D.. “Judgment Under Uncertainty: Heuristics and Biases.” Science, 185 (1974), 1124–1131.CrossRefGoogle ScholarPubMed
Uysal, V. B. “Deviation from the Target Capital Structure and Acquisition Choices.” Journal of Financial Economics, 102 (2011), 602–620.CrossRefGoogle Scholar
Zhang, X. F. “Information Uncertainty and Stock Returns.” Journal of Finance, 61 (2006), 105–137.CrossRefGoogle Scholar
Supplementary material: PDF

Fich and Xu supplementary material

Online Appendix

Download Fich and Xu supplementary material(PDF)
PDF 283.1 KB