We study the impact of “style investing” on the market for corporate control. We argue that the choice of the bidder is influenced by the fact that the merge with a firm that belongs to an investment style more popular with the market may boost the bidder's value. By using data on the flows in mutual funds, we construct a measure of popularity, which relies directly on the identification of sentiment-induced investor demand, rather than being a direct transformation of stock market data. We show that differences in popularity between bidder and target help to explain their pairing. The merger with a more popular target generates a halo effect from the target to the bidder that induces the market to evaluate the assets of the less popular bidder at the (inflated) market value of the more popular target. Both bidder and target premiums are positively related to the difference in popularity between the target and the bidder. However, the target's ability to appropriate the gain is reduced by the fact that its bargaining position is weaker when the bidder's potential for asset appreciation is higher. We document a better short- and medium-term performance of less popular firms taking over more popular firms. The bidder managers engaging in these cosmetic mergers take advantage of the window of opportunity induced by the deal to reduce their stake in the firm under convenient conditions.

Using trade and quote data from the NYSE, we examine the relation between dealer attention, dealer revenue, and the probability of informed trade. We find that dealer revenue net of losses to better-informed traders in NYSE stocks is positively related to the speed at which quotes adjust to full information levels. The speed of quote adjustment is faster for stocks with greater dealer attention, as measured by a stock’s relative prominence at its post and panel location on the NYSE floor. The level of dealer attention in turn is positively related to a stock’s probability of information-based trading. The results are consistent with a theoretical model we derive in which dealers trade multiple securities and must optimally allocate their limited attention to monitoring order flow to minimize losses to better-informed traders.