CBR Briefing #16

Feb 26, 2018

Sections Finance

Why no news is news
The absence of news reports and the passage of time often contain important information markets tend to overlook

Research suggests that investors, by underreacting to information tied to the passage of time, are ignoring potential profits.
  • 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.