Is the market biased in M&A, dividend payment, and share repurchase events?

Abstract

Companies with excess capital can opt to: pay dividends to shareholders, buy back treasury shares for short-term shareholder benefits, or pursue M&A investments for long-term shareholder returns. Using difference in differences approach of event research methods combined with unique manually collected data sets, this paper investigates the market bias for three events: M&A, share repurchase, and dividend payment. The results show that information was leaked to the outside 1 day before it was officially announced at all events. When observing the company's performance 3 years after the event announcement, we also find that the market reaction is biased in M&A and stock dividend payment events, but accurate in the cash dividend payment and share repurchases. In addition, the market has the strongest and longest reaction to the news of the company buying back shares; has the weakest reaction to the stock dividend payment; has the shortest reaction to cash dividend payment; has a negative reaction to the acquisition company's stock, and has a positive reaction to the target company's stock. Our research has provided empirical evidence on the market response to published information, and supports CEOs make the most accurate choices when the company has an excess cash flow.