Limited attention and M&A announcements

We analyze the relationship between investor attention, measured by Google search volume, and M&A performance. On average, we find that investors’ attention to a merging firm increases as the announcement date approaches, peaks on the announcement day, and remains elevated for a few days afterward. More importantly, abnormal attention on the day of the announcement has a heterogeneous relationship with post-announcement abnormal returns, which depends on the amount of news coverage received by the merging firm. The relationship is positive for mergers with higher news coverage and appears to be due to positive price pressure induced by retail investors. In contrast, the relationship is negative for mergers with low news coverage and is likely due to faster assimilation of new information by relatively more sophisticated investors who anticipate that the market generally overvalues M&A transactions. We also address the causal relation between abnormal attention and abnormal returns using a novel instrumental variable.