Information, rationality and M&A gains

A fundamental difference between neoclassical and behavioural finance theory is the perception of information. Whilst the neoclassical finance view assumes perfect information and rational behaviour of market participants, behavioural finance suggests cognitively and emotionally biased perceptions resulting in irrational behaviour. Given these differences, this thesis investigates three issues in the context of M&A gains: (i) The expected reduction of information asymmetries due to the adoption of IFRS in the European Union, (ii) investor perception of information on broader industry factors, and (iii) the impact of investor sentiment on M&A gains. One of the regulators’ intentions in adopting IFRS in the European Union was to promote an efficient financial capital market. The wide range of national accounting standards was considered by some to be a significant source of information asymmetry across European companies. Chapter 4, therefore, examines the effect of the accounting harmonisation on the reduction of information asymmetries based on M&A gains. The overall gains show only a very small effect from the adoption of IFRS. However, the results based on potentially high information asymmetry characteristics, such as EU cross-border deals or stock payments, suggest improved transparency. Based on these results, the adoption of IFRS therefore contributed to an improved information environment within the EU markets. Chapter 5 analyses the impact of information on broad industry factors. For this purpose, the returns to acquiring companies and their industry prospects are examined. The aim of this study is to establish new insights on the investors’ perception of information on an industry level, as well as, their preferences on acquisition strategies based on the prevailing industry prospects. A positive relationship between industry prospects and the acquirer’s gains is found and the effect is persistent in focused deals, but disappears in diversifying deals. Further tests confirm that investors appreciate information on industry prospects, as well as, the growth opportunities acquired in the transaction. Chapter 6 finally examines the impact of investor sentiment on M&A gains. Several studies link investor sentiment to various areas of finance, as well as, specifically to corporate finance. An irrational bias in the returns to acquiring firms would challenge the traditional notion of announcement returns as an indicator of the acquisition’s value creating effect. The results suggest a significant relationship between sentiment and the returns from M&A. Additional tests confirm sentiment research that investors react differently to information asymmetries and valuation signals during positive and negative sentiment changes. As a whole, the findings suggest that investor sentiment influences M&A gains.