Planteamiento del problema

Acquirers

“When market sentiment is bullish, managers may feel encouraged to make acquisitions because they believe the market expects firms to undertake growth- enhancing initiatives like acquisitions. By the same token, when the market sentiment is bearish, the market does not expect acquisitions, and managers respond by avoiding acquisitions unless they are reasonably certain that the synergies are large enough to justify going against market sentiment and expectations.“

(Bouwman et al. 2003)

In an efficient market, mispricing should not exist because arbitrageurs exploit these opportunities and drive prices back to efficiency (Friedman 1953). A significant number of studies, however, find evidence that challenge this neoclassical finance view. Besides recent asset bubbles and crashes, empirical evidence exists that make it difficult to

explain these anomalies by pure rational behaviour, suggesting that prices are also driven by psychology (Shleifer 2000a).

Investor sentiment is defined by Lee et al. (1991) as the belief that future cash flows and risk do not match the information available. Baker and Wurgler (2007) regard investor sentiment as the investors’ propensity to speculate or the investors’ optimism or pessimism about stocks. One aspect, however, can be distilled from all proposed definitions: The market price of an asset does not correspond to its fundamental value. Shleifer and Vishny (1997) suggest that rational investors may not try to push prices towards their fundamental values, as betting against sentimental investors is costly and risky. De Long et al. (1990) argue that the behaviour of irrational investors is unpredictable, making arbitrage trading unattractive. Moreover, arbitrageurs may face additional limitations, such as short-term horizons, transaction costs or short selling restrictions, which prevent them from implementing adequate trading strategies.

Most models and studies assume that investor sentiment is driven by irrational behaviour. However, a changing market sentiment could actually be “a rational reflection of prosperous times to come, an irrational hope for the future, or some combination of the two” (Brown and Cliff 2005). Rational shifts in sentiment, for example, include reactions to new information on dividends, or news generated by the trading process itself (Shleifer and Summers 1990)17_{. Verma and Soydemir (2006)} document rational and irrational factors in investor sentiment in several stock markets.

Rational factors may lead to changes in investor sentiment. However, this study follows the definition of investor sentiment as irrational behaviour. Together with limited arbitrage opportunities, investor sentiment prevents prices from efficiency (Shleifer 2000b).

As mentioned, prices can greatly deviate from their intrinsic values during periods

when sentiment overrides rationality. Several empirical studies document anomalies, which are attributable to a psychological impact on asset prices. Lee et al. (1991), for example, find evidence that discounts on closed-end funds are a proxy for changes in investor sentiment. They suggest that fund discounts are high if the sentiment is pessimistic about the future and low when sentiment is optimistic. Neal and Wheatley (1998) find evidence that closed-end funds predict the difference between the returns of small and large firms.

Another finance area, which seems to be affected by investor sentiment are IPOs. Ritter (1991) documents that returns of IPO stocks reverse over the long-run. He argues that this is due to periodic waves of optimism and particularly impacts stock prices of young growth companies. Baker and Wurgler (2000) find that firms prefer to issue equity before low market return periods and debt before high return periods. They suggest that their findings indicate a stronger predictor of the one-year-ahead returns than other predictors. Cornelli et al. (2006) focus on the European grey market for IPOs and find that small investors act irrationally by overweighting their information, which suggests that these investors are driven by overconfidence. They further state if underwriters and other institutional investors know what sentimental investors are willing to pay then the sentimental investors’ optimism will generate short-term price patterns.

According to Brown and Cliff (2005), investor sentiment predicts long-term market returns over the next one to three years. They attribute these findings to limited arbitrage in the long- but not in the short-run. In Baker and Wurgler (2006, 2007), they form a sentiment index and show that investor sentiment has a significant effect on difficult-to-value stocks.

and emotional biases.18 _{Kahneman and Tversky (1979) propose prospect theory to} explain how investors actually behave, instead of how they should act in an expected utility context. Depending on future prospects, investors are sometimes risk averse or risk seeking and the valuation of prospects depends on gains and losses relative to a reference point. Further, investors are averse to losses because losses are disproportionally felt more than gains (Ackert and Deaves 2010). Black (1986) states that sentimental investors act irrationally on noise in the market as if it were information, believing it would give them an advantage without actually being insider information. Daniel et al. (1998) show that overconfident investors overweight self- generated information and as a result, cause an overreaction of share prices. In addition, if investors exhibit attribution bias, they account success to their personal abilities and attribute losses to circumstances beyond their control. In similar vein, Barberis et al. (1998) demonstrate that when irrational investors receive new information, they tend to pay too much attention to the strength and too little attention to its statistical weight. As a result, share prices underreact to corporate events, such as earnings announcement, but overreact to patterns of good or bad news. Mian and Sankaraguruswamy (2012) find that price reactions to earnings announcements are greater for good news in periods of high sentiment and lower for bad news in low sentiment.

3.4

Conclusion

This literature review demonstrates the relevance of event studies, as a model to evaluate the identified research issues in this thesis. The vast number of articles using this technique underpins the versatility in its application to assess corporate decisions. In the context of M&A research, several factors have been found to influence the returns around announcements. These range from deal-specific to market-wide factors.

18 See, for example, Grossman and Stiglitz (1980), Black (1986), Campbell and Kyle (1993), Shleifer and Vishny (1997) and Hong and Stein (1999) for further theoretical models

In this context three empirically testable issues have been identifies. This review also provides the background on the literature on: (i) The adoption of IFRS within the European Union, (ii) the relevance of information on industry growth prospects and (iii) the impact of investor sentiment on several finance areas.

4.

Information Asymmetries and the