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Assimilation Effects in Financial Markets

Published online by Cambridge University Press:  11 October 2022

Eliezer M. Fich  and
Guosong Xu Open the ORCID record for Guosong Xu [Opens in a new window]
Eliezer M. Fich
Affiliation:
Drexel University LeBow College of Business [email protected]
Guosong Xu*
Affiliation:
Erasmus University Rotterdam School of Management
*
[email protected] (corresponding author)
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Abstract

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An assimilation bias occurs when people’s evaluative judgment is positively influenced by a previously observed signal. We study this effect by examining investors’ appraisal of M&A deals announced 1 day after other firms in the same 1-digit SIC as the merging parties release earnings surprises. Consistent with assimilation effects, acquirers’ M&A announcement stock return initially correlates with the previous day’s earnings surprises. This effect reverses after 1 week. Assimilation generates other distortions as more positive surprises are related to increases in bid competition, takeover premiums, and withdrawn M&As. Evidence from IPOs corroborates the presence of assimilation effects in financial markets.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 58 , Issue 7 , November 2023 , pp. 2890 - 2927
Creative Commons
Creative Common License - CCCreative Common License - BY
This is an Open Access article, distributed under the terms of the Creative Commons Attribution licence (https://creativecommons.org/licenses/by/4.0), which permits unrestricted re-use, distribution and reproduction, provided the original article is properly cited.
Copyright
© The Author(s), 2022. Published by Cambridge University Press on behalf of the Michael G. Foster School of Business, University of Washington

Footnotes

For helpful comments we thank Yakov Amihud, Nihat Aktas, Gennaro Bernile, Bruce Carlin, Cláudia Custódio, Lauren Cohen, Casey Dougal, Daniel Dorn, Ran Duchin, Joey Engelberg, Denis Gromb, Sam Hartzmark (discussant), Zoran Ivkovich, Philip Joos, Stephen Karolyi, Markku Kaustia, Alok Kumar, Fangyuan Ma (the referee), Paul Malatesta (the editor), Adrien Matray, Micah Officer, Chris Parsons, Farzad Saidi, Daniel Schmidt, David Yermack, Burcin Yurtoglu, and participants in seminars at Cheung Kong Graduate School of Business, the City University of Hong Kong, Erasmus University, ESSEC Business School, Frankfurt School of Finance & Management, Humboldt-Universität zu Berlin, Louisiana State University, Peking University (Guanghua), University of Lille II, University of Miami, University of Missouri, UNLV, and session attendees to the 2018 Research in Behavioral Finance Conference in Amsterdam, and the 2019 AFA meetings in Atlanta. All errors are our responsibility. A previous version of this paper was titled “Are Market Reactions to M&As Biased by Over-Extrapolation of Salient News?”

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