How do investors react to acquisition announcements: Do they make the objective, rational estimates of a deal’s value-creation potential, or do they draw heavily on management’s perception as inferred from the premium it pays?

The answer is the latter, according to ‘The Vicarious Wisdom of Crowds: Toward a Behavioural Perspective on Investor Reactions to Acquisition Announcements,’ a research paper by Mario Schijven and Michael A. Hitt ( >www.ssrn.com ). Adding, however, that investors do not blindly follow management’s perception, but actively attempt to assess its reliability based on the public information available to them, the authors note that the ‘wisdom of crowds’ typically ascribed to investors’ stock market reactions may, above all, be a vicarious form of ‘wisdom.’

The paper, based on a multi-industry sample of more than 1,600 acquisitions over the 15-year period from 1990 through 2004, reminds that despite management’s superior information, many acquisitions destroy acquirer value, and that the management is often susceptible to overpayment.

Arguing, therefore, that although information about the premium paid should, in principle, reduce the information asymmetry that investors face, it may not provide an unbiased signal of the actual synergy to be had from a deal, the authors observe that the investors draw on a variety of additional pieces of public information in an attempt to assess the reliability of management’s perception as reflected in the premium.

Work that adds value to the efforts on understanding investors.

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