Sentiment-Driven Merger Waves

Abstract

In this study, we examine the link between the industry-specific optimism and the formation of merger waves as well as the impact of firm-specific optimism on mergers’ value destruction. Mergers and acquisitions are among the most frequently exercised strategic decisions, often occurring in waves. The extant literature draws on neo-classical or behavioral theory to explain the formation of merger waves. The neo-classical theory fails to fully explain post-merger waves value destruction. A void filled by the behavioral theory drawing primarily on the overvaluation concept and principally neglecting the function of sentiment, as a critical component, in the formation of merger waves and the post-wave value destruction. Through large-scale textual analysis of news releases, this study provides direct evidence that industry-specific optimism plays a pivotal role in the formation of merger waves. Further, we demonstrate that firm-specific optimism, fostered by industry-specific optimism, creates managerial overconfidence, leading to significant value destruction. Our research sheds new light on why merger waves occur and why merger waves result in inadvertent outcomes.