Investor Inattention to All-Cash Acquisition Announcements: A Joint Day-Time Analysis in the Spanish Market

Prior studies suggest that investors have limited attention, which determines the speed with which information is incorporated into share prices and, in turn, affects the efficiency of the markets. Unlike other corporate events, the information contained in an acquisition announcement is generally less standard and more complicated to process. Therefore, investor inattention is less likely around this event. In this study we test the existence of investor inattention for a sample of all-cash acquisition announcements of listed and unlisted target firms released by listed Spanish firms from 1998 to 2018. Cash acquisitions allow us to control for the strategic behavior of overvalued companies engaged in stock-financed acquisitions. We perform a joint analysis of day of the week and time of trade from both a univariate and a multivariate perspective, after controlling for several factors that are related to the market reaction to acquisition announcements. Consistent with the notion that investors are less attentive to Friday announcements, we find a significant lower market reaction to acquisition announcements released during market trading hours both in terms of price and trading volume.

Short- and Long-Horizon Behavioral Factors

We propose a theoretically motivated factor model based on investor psychology and assess its ability to explain the cross-section of U.S. equity returns. Our factor model augments the market factor with two factors that capture long- and short-horizon mispricing. The long-horizon factor exploits the information in managers’ decisions to issue or repurchase equity in response to persistent mispricing. The short-horizon earnings surprise factor, which is motivated by investor inattention and evidence of short-horizon underreaction, captures short-horizon anomalies. This 3-factor risk-and-behavioral model outperforms other proposed models in explaining a broad range of return anomalies. (JEL G12, G14) Authors have furnished an Internet Appendix, which is available on the Oxford University Press Web site next to the link to the final published paper online.