Investor Inattention to All-Cash Acquisition Announcements: A Joint Day-Time Analysis in the Spanish Market

José Emilio Farinós,Begoña Herrero,Miguel Ángel Latorre

doi:10.3390/su13020721

José Emilio Farinós, Begoña Herrero + Show 1 more

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https://doi.org/10.3390/su13020721

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Abstract

Prior studies suggest that investors have limited attention, which determines the speed with which information is incorporated into share prices and, in turn, affects the efficiency of the markets. Unlike other corporate events, the information contained in an acquisition announcement is generally less standard and more complicated to process. Therefore, investor inattention is less likely around this event. In this study we test the existence of investor inattention for a sample of all-cash acquisition announcements of listed and unlisted target firms released by listed Spanish firms from 1998 to 2018. Cash acquisitions allow us to control for the strategic behavior of overvalued companies engaged in stock-financed acquisitions. We perform a joint analysis of day of the week and time of trade from both a univariate and a multivariate perspective, after controlling for several factors that are related to the market reaction to acquisition announcements. Consistent with the notion that investors are less attentive to Friday announcements, we find a significant lower market reaction to acquisition announcements released during market trading hours both in terms of price and trading volume.

Highlights

Investors’ attention drives the decision-making process and the incorporation of new information into prices
We found evidence consistent with the notion that investors are less attentive to Friday announcements than to non-Friday announcements, as we found a significant lower market reaction to acquisition announcements of unlisted target firms released during market trading hours in terms of both price and trading volume
We show that the ample previous evidence that cash-financed acquisitions of unlisted firms are associated with wealth increases for bidders immediately after the announcement does not hold any longer when we introduce limited investor attention in the analysis

Summary

Introduction

Investors’ attention drives the decision-making process and the incorporation of new information into prices. Investors are exposed to a significant amount of information (market-specific, sector-specific, or firm-specific information) that needs to be processed and incorporated into trading which, eventually, is reflected in the stock prices. The reasoning is that investors and traders might get distracted by the weekend and pay less attention to corporate news on Friday, which would result in a market underreaction to the announcement. Research on the impact of limited investor attention on market reaction to news covers different types of corporate events. Empirical evidence of the impact of limited investor attention was based on scheduled release of accounting information, such as earnings announcements [1,2,3]. Some research has extended the focus to corporate news events other than earnings and merger announcements, including announcements of stock repurchases, seasoned equity offerings and dividend changes [8,9] as well as analyst recommendation changes [10]

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