Why no news is news
The absence of news reports and the passage of time often contain important information markets tend to overlook
- Investors tend to give insufficient attention to the importance of a lack of big news when weighing whether a corporate merger will succeed, according to an analysis of more than 5,000 mergers from 1970 to 2010 by Chicago Booth’s Stefano Giglio and Kelly Shue.
- The passage of time after a merger announcement offers information about the probability a merger will be completed. Following M&A announcements, the “hazard rate” of completion (the likelihood that a pending merger will be completed within the week) forms a consistent hump shape when charted. This pattern holds across a variety of mergers.
- Weekly returns on merger investment strategies can be predicted by looking at the average probability, in each week, that a pending merger will be completed. When the probability of completion is high, average returns are also high (see chart). Investors can profit by investing in those weeks.
- The higher returns do not come with higher risk or transaction costs. The researchers argue that by overlooking information tied to the passage of time, investors initially underestimate the probability a merger will be completed and then overestimate the probability later.
- The mispricing is stronger for deals that involve less liquid stocks and higher transaction costs, suggesting that a lack of market liquidity prevents arbitrage by more sophisticated investors.