Mistaking Bad News for Good News: M&A Optimism and Mispricing of Strategic Alternatives Announcements
61 Pages Posted: 11 Jan 2023 Last revised: 21 Mar 2024
Date Written: March 15, 2024
Abstract
A company’s announcement that it is evaluating strategic alternatives (SA) is one of the most disruptive corporate events, calling the company’s future existence into question. This event also results in one of the most severe cases of stock mispricing. We seek to understand why SA announcements predict severe stock underperformance. Our findings suggest that mispricing occurs because investors are overly optimistic about a potential merger or acquisition and do not fully incorporate the negative fundamental news conveyed by the announcement. Meanwhile, sophisticated investors appear aware of the mispricing. We also evaluate risk and market frictions. This study is important because it sheds light on one of the most severe cases of mispricing, challenges the conventional wisdom that SA announcements reflect good news, and informs investors and analysts about a behavioral heuristic they might unknowingly adopt.
Keywords: Corporate disclosure; stock returns; mergers and acquisitions; market efficiency; behavioral finance
JEL Classification: G12, G14, G34, G41, M41
Suggested Citation: Suggested Citation