Working Paper: NBER ID: w18914
Authors: Stefano Giglio; Kelly Shue
Abstract: As illustrated in the tale of "the dog that did not bark," the absence of news and the passage of time often contain information. We test whether markets fully incorporate this information using the empirical context of mergers. During the year after merger announcement, the passage of time is informative about the probability that the merger will ultimately complete. We show that the variation in hazard rates of completion after announcement strongly predicts returns. This pattern is consistent with a behavioral model of underreaction to the passage of time and cannot be explained by changes in risk or frictions.
Keywords: mergers; market underreaction; hazard rates; behavioral finance
JEL Codes: G02; G14; G34
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| hazard rates of merger completion (G34) | returns (Y60) |
| high hazard rates (C41) | higher expected returns (G12) |
| low hazard rates (C41) | lower returns (G19) |
| hazard rates (C41) | agents' beliefs about merger completion probabilities (D80) |
| agents' beliefs about merger completion probabilities (D80) | returns (Y60) |