Do corporations learn from mispricing? Evidence from takeovers and corporate performance

Research output: Contribution to journalArticlepeer-review

Authors

External organisations

  • University of Glasgow

Abstract

In this article we form the simple prediction that mispricing encourages traders to collect costly information that guides managerial decisions at corporate level. Our findings support this prediction based on evidence derived from both the US market for corporate control as well as the overall variation in aggregate corporate profits. The trading activity in response to the temporary mispricing of the merging companies provides useful information that leads to the design of high-synergy deals. Such synergies are reflected in an increase in the announcement period acquirer abnormal returns and are not reversed in the long-run. At the market-wide level, our results suggest that the growth in the overall stock trading volume in response to market mispricing is associated with high future corporate profit growth. Overall, after controlling for several economic and financial conditions, the temporary mispricing in a developed and generally efficient stock market stimulates informative trading, ultimately leading to value- and performance-enhancing corporate decisions.

Details

Original languageEnglish
Pages (from-to)1-34
Number of pages34
JournalInternational Review of Financial Analysis
Early online date4 Sep 2017
Publication statusE-pub ahead of print - 4 Sep 2017

Keywords

  • Mispricing, Information , Acquisitions , Corporate profits, Acquirer returns