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Disagreement and the informativeness of stock returns: The case of acquisition announcements

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  • Bargeron, Leonce L.
  • Lehn, Kenneth
  • Moeller, Sara B.
  • Schlingemann, Frederik P.

Abstract

We examine whether disagreement between managers and investors, in the context of mergers and acquisitions, affects the information contained in bidder returns. We test the disagreement hypothesis, which posits that disagreement causes investors to be less certain about their revaluation of acquiring firms, making bidder returns less informative. Consistent with this hypothesis, we find an inverse relation between bidder returns, which proxy for the degree of disagreement, and the change in the bidders' implied volatility. Also consistent with the hypothesis, we find that the significant inverse relation between bidder returns and the change in implied volatility holds only for cases of negative bidder returns. We test for alternative explanations of this relation, but continue to find robust support for the disagreement hypothesis. Finally, the relation between bidder returns and the likelihood of deal completion is stronger when announcement returns are more informative, suggesting managers “listen to the market” more when the market response is more informative.

Suggested Citation

  • Bargeron, Leonce L. & Lehn, Kenneth & Moeller, Sara B. & Schlingemann, Frederik P., 2014. "Disagreement and the informativeness of stock returns: The case of acquisition announcements," Journal of Corporate Finance, Elsevier, vol. 25(C), pages 155-172.
    • Handle: RePEc:eee:corfin:v:25:y:2014:i:c:p:155-172
    DOI: 10.1016/j.jcorpfin.2013.11.014
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    Cited by:

    1. Croci, Ettore & Petmezas, Dimitris, 2015. "Do risk-taking incentives induce CEOs to invest? Evidence from acquisitions," Journal of Corporate Finance, Elsevier, vol. 32(C), pages 1-23.
    2. Driouchi, Tarik & So, Raymond H.Y. & Trigeorgis, Lenos, 2020. "Investor ambiguity, systemic banking risk and economic activity: The case of too-big-to-fail," Journal of Corporate Finance, Elsevier, vol. 62(C).
    3. Doukas, John A. & Zhang, Rongyao, 2020. "Corporate managerial ability, earnings smoothing, and acquisitions," Journal of Corporate Finance, Elsevier, vol. 65(C).
    4. Reddy, Kotapati Srinivasa, 2015. "Why do Cross-border Merger/Acquisition Deals become Delayed, or Unsuccessful? – A Cross-Case Analysis in the Dynamic Industries," MPRA Paper 63940, University Library of Munich, Germany, revised 2015.

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    More about this item

    Keywords

    Disagreement; Bidder returns; Implied volatility; Uncertainty; Informativeness; Mergers and acquisitions;
    All these keywords.

    JEL classification:

    • G30 - Financial Economics - - Corporate Finance and Governance - - - General
    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance

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