Stock Price Movements and Trading Behaviors Around Merger and Acquisition Announcements: Evidence from the Korean Stock Market

Abstract

This study examines the relationship between price movements of target firms’ stocks and behaviors of local individual, local institutional, and foreign investors in trading target firms’ stocks around mergers and acquisitions announcements in Korea. Results reveal that the average abnormal return (AAR) becomes significantly positive three days prior to the announcement date and becomes insignificant after the announcement date. Results also show that local individual investors tend to sell more intensely prior to announcements for target firms with larger wealth effects. In contrast, foreign investors tend to buy target stocks with larger wealth effects more intensely prior to the announcement date, and then they sell them more intensely in the post-announcement period. This may imply that foreign investors are able to identify target stocks with large wealth effects prior to the announcement date and they realize short-term profits by selling them following the announcement.