Do Corporations Learn from Mispricing? Evidence from Takeovers and Corporate Performance

Posted: 16 Mar 2021

See all articles by Samer Adra

Samer Adra

University of Birmingham

Leonidas G. Barbopoulos

University of Edinburgh

Date Written: 2020

Abstract

In this article we form the simple prediction that mispricing encourages traders to collect costly information that guides managerial decisions at corporate level. Our findings support this prediction based on evidence derived from both the US market for corporate control and the overall variation in aggregate corporate profits. The trading activity in response to the temporary mispricing of the merging companies provides useful information that leads to the design of high-synergy deals. Such synergies are reflected in an increase in the announcement period acquirer abnormal returns and are not reversed in the long-run. At the market-wide level, our results suggest that the growth in the overall stock trading volume in response to market mispricing is associated with high future corporate profit growth. Overall, after controlling for several economic and financial conditions, the temporary mispricing in a developed and generally efficient stock market stimulates informative trading, ultimately leading to value- and performance-enhancing corporate decisions.

Keywords: Mispricing, Information, Acquisitions, Acquirer returns, Corporate profits

JEL Classification: G14, G34

Suggested Citation

Adra, Samer and Barbopoulos, Leonidas G., Do Corporations Learn from Mispricing? Evidence from Takeovers and Corporate Performance (2020). International Review of Financial Analysis, Vol. 68, 2020, Available at SSRN: https://ssrn.com/abstract=3797062

Samer Adra

University of Birmingham ( email )

Edgbaston, Birmingham B15 2TT
United Kingdom

Leonidas G. Barbopoulos (Contact Author)

University of Edinburgh ( email )

University of Edinburgh Business School
29 Buccleuch Place
Edinburgh, Scotland EH8 9JS
United Kingdom

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