Do Insiders Learn from Outsiders? Evidence from Mergers and Acquisitions



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    • *Yuanzhi is a hedge fund portfolio manager at OTA Asset Management. The paper was first submitted and accepted when I was at Goldman, Sachs & Co. It is adapted from Chapter 1 of my Ph.D. dissertation at the University of Rochester. I am most indebted to my advisor, John Long. I thank him for instilling in me a scientific attitude to research and for offering sound advice throughout this project. During the adaptation, the questions and suggestions of an anonymous referee and Rick Green (the previous editor) have also been very helpful. In addition, the paper has benefited from comments by Andrew Alford, Elizabeth Demers, Gregg Jarrell, Chris Jones, Xiaolei Liu, Clifford Smith, Ross Watts, and participants of the 2004 AFA Annual Meeting. I thank Sandra Sizer for editorial assistance. The usual disclaimers apply.


I find that the market reaction to a merger and acquisition (M&A) announcement predicts whether the companies later consummate the deal. The relation cannot be explained by the market's anticipation of the closing decision or its perception of the deal quality at the announcement. Merging companies appear to extract information from the market reaction and later consider it in closing the deal. Furthermore, the relation varies with deal characteristics, suggesting that companies seem to have a higher incentive to learn from the market when canceling the announced deal is easier or when the market has more information that the companies do not know.