Merger Momentum and Investor Sentiment

May 2006
Richard J. Rosen, Federal Reserve Bank of Chicago

Rosen examines the effects of mergers on on the stock prices of the firms bidding for shares in others.

He finds evidence of momentum in merger markets: When the market has been reacting favorably to merger announcements, it tends to continue to do so.

Similarly, mergers announced during hot stock markets tend to get a better reaction from the market than those announced in a cold market.

Rosen investigates long-run stock returns for bidding firms. He finds evidence that the short-run reaction to a market announcement is reversed in the long run.

Acquisitions announced in hot merger markets lead to long-run declines in the bidder’s stock price, but there is some evidence that acquisitions announced in hot stock markets are associated with long-run returns that are no higher, and possibly lower, than those announced in cold stock markets.

Evidence is found that that, with all else held equal, the short-run reaction to an announcement is fully reversed over the next three years.

Rosen's results are consistent with investor sentiment being an important factor in the market reaction to a merger announcement.