Assimilation Effects in Financial Markets

Eliezer M. Fich; Guosong Xu

doi:10.1017/s0022109022001168

Journal of Financial and Quantitative Analysis Vol. 58 No. 7 2023

Assimilation Effects in Financial Markets

Eliezer M. Fich^{1,2,3,4,5,6,7,8,9}; Guosong Xu ^{1,2,3,4,5,6,7,8,9}

¹ Louisiana State University · ² University of Miami · ³ City University of Hong Kong · ⁴ Peking University · ⁵ Cheung Kong Graduate School of Business · ⁶ Drexel University · ⁷ University of Missouri · ⁸ Miami University · ⁹ Erasmus University Rotterdam

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Abstract

An assimilation bias occurs when people’s evaluative judgment is positively influenced by a previously observed signal. We study this effect by examining investors’ appraisal of M&A deals announced 1 day after other firms in the same 1-digit SIC as the merging parties release earnings surprises. Consistent with assimilation effects, acquirers’ M&A announcement stock return initially correlates with the previous day’s earnings surprises. This effect reverses after 1 week. Assimilation generates other distortions as more positive surprises are related to increases in bid competition, takeover premiums, and withdrawn M&As. Evidence from IPOs corroborates the presence of assimilation effects in financial markets.

DOI: 10.1017/s0022109022001168
Volume: 58
Issue: 7
Pages: 2890-2927
Language: en
Sources: openalex bibtex:phds-export.bib crossref

Assimilation Effects in Financial Markets

Abstract

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