Abstract
News sentiment alters investors’ perceptions of companies and their stock prices, which can affect managerial decisions. We analyze such influence on firms’ decisions in the context of mergers and acquisitions. We theorize how news sentiment about potential targets may affect target selection and test our hypotheses using a novel instrument based on the disturbance to news coverage due to exogenous events. Our findings show that reduction in positive news sentiment diminishes a potential target’s stock price and increases the probability that it is selected by the acquirer, uncovering potential inefficiencies in the market for corporate control. Further, acquirers with long-term orientation are less sensitive to these news-induced price distortions when selecting their target. We also find that when these distortions encourage myopic acquirers to select an undervalued but suboptimal target from a synergistic point of view, the long-run performance of the acquisition drops.
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