How the media influences the stock market performance of acquiring firms

Femke van Daalen en Killian J McCarthy, onderzoekers aan de Rijksuniversiteit Groningen, onderzochten de invloed van mediaverslaggeving op de aandelenkoersen van overgenomen (beursgenoteerde) bedrijven. De uitkomst is verrassend.
Femke van Daalen en Killian J McCarthy 
Every day more than 110 mergers and acquisitions are announced, and research suggests that as much as 85 percent of these are doomed to fail (King et al., 2004; Calipha et al., 2010). In the process, billions are wiped off the stock market value of the acquiring and target firms. 
The process, of course, is a complex one. And shareholders, as outsiders, often find it hard to estimate the probability that proposed deal will be a success or a failure. In such situations – that is, in situations of asymmetric information – investors will look to external sources of information when coming to their conclusion. Clearly, therefore, external information providers, such as the media, are likely to impact the way in which investors react to the deal (Tetlock, 2010; Buehlmaier, 2013). More, and better media coverage should, theoretically speaking, lead to more efficient prices, and better performance (DellaVigna and Pollet, 2009; Fang and Peress 2009).
But does it? And does the way in which the media talks about an acquisition actually influence the way in which the market behaves?
In our research project, we considered precisely these questions. We constructed a sample of 184 acquisitions, announced in the period January 2012 to December 2014, and collected a total of 2,519 news articles, from financial newspapers, describing these acquisitions. For each acquisition, we then measured the so-called ‘volume’ of the media’s coverage (number of articles) as well as the ‘tone’ of the media’s coverage (that is, the ratio of positive to negative words in each article). 
We expected that the volume of the media’s coverage would have a positive effect on the way in which the stock market reacted to the announcement – reasoning that the more information, the more likely that the market could properly evaluate the deal. In addition we expected that a negative tone in the coverage would have a negative effect on performance – reasoning that the market would react negatively to a negative discussion of the acquisition.
We supported the first suggestion but, did not found support for the second suggestion. Remarkably, we not only failed to support that suggestion, but found precisely the opposite to be the case: we found that the more negative the media was about the deal, the more positively the market reacted. In all cases, we controlled our analysis for other firm- and deal-specific explanations, such as the timing of the deal, the firms industry, the level of relatedness, and the methods of payment. 
So why negative media coverage predict a positive stock market reaction? We know that people pay more attention to negative news, we know that negative news generates news, we know that investors are more likely to buy stocks that are in the news (Barber and Odean, 2008), and we know that inattention causes investors to underreact to market changes (Peress, 2008). In other words, it seems that there really is no such thing as bad news, not even in the case of acquisitions. 

About the Authors: 
Femke van Daalen, MSc, is recently graduated from the University of Groningen with a master in Strategic Innovation Management. For her master thesis she measured the effect of the media on the stock market performance of acquiring firms.
Dr. Killian J McCarthy is an Professor in the Economics of Strategy at the University of Groningen, and the Director of the Masters Program Strategic Innovation Management. For his PhD he considered the performance of 35,000 international mergers and acquisitions from Asia, Europe and North America. 
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Buehlmaier, M. M. M. (2013). The Role of the Media in Takeovers: Theory and Evidence, Working Paper Series, The University of Hong Kong. motives, and success factors. In: Cooper, C., & Finkelstein, S. (eds.) Advances in

Calipha, R., Tarba, S., & Brock, D. (2010). Mergers and acquisitions: a review of phases, Mergers & Acquisitions: Vol. 9, London: Emerald Group Publishing.

DellaVigna, S., & Pollet, J. M. (2009). Investor inattention and Friday earnings announcements. The Journal of Finance, 64(2), 709-749.

Fang, L., & Peress, J. (2009). Media Coverage and the Cross‐section of Stock Returns. The Journal of Finance, 64(5), 2023-2052.

King, D. R., Dalton, D. R., Daily, C. M., & Covin, J. G. (2004). Meta‐analyses of post‐acquisition performance: Indications of unidentified moderators. Strategic Management Journal, 25(2), 187-200.

Peress, J. (2008). Media coverage and investors’ attention to earnings announcements. New York, 33(0), 1-57.

Tetlock, P.C. (2010). Does public financial news resolve asymmetric information?. Review of Financial Studies, 23(9), 3520-3557. 
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