1. Introduction
Investors’ attention drives the decision-making process and the incorporation of new information into prices. Investors are exposed to a significant amount of information (market-specific, sector-specific, or firm-specific information) that needs to be processed and incorporated into trading which, eventually, is reflected in the stock prices. As investor attention is a scarce resource, a fundamental point in this process is the extent to which new information captures investors’ attention.
Previous research suggests that investors might pay less attention to information released on Friday than to similar information released on other days of the week. The reasoning is that investors and traders might get distracted by the weekend and thus pay less attention to corporate news on Friday, which would result in a market underreaction to the announcement. Research on the impact of limited investor attention on market reaction to news covers different types of corporate events. Initially, empirical evidence of the impact of limited investor attention was based on scheduled release of accounting information, such as earnings announcements [
1,
2,
3]. Later, research analyzed whether investor inattention affects the market response to merger announcements [
4,
5,
6,
7]. Finally, some research has extended the focus to corporate news events other than earnings and merger announcements, including announcements of stock repurchases, seasoned equity offerings and dividend changes [
8,
9] as well as analyst recommendation changes [
10].
We focused on acquisition announcements made by Spanish listed firms. The analysis of investor attention’s effect on value creation for the acquirer is of interest for two reasons. First, corporate acquisition is a strategic business decision with an uncertain result for the acquirer. Previous research has documented significant positive abnormal returns to acquirers around the acquisition of unlisted targets, whereas the results for returns to acquirers of listed companies are mixed, with significantly negative or no significant abnormal returns [
11]. Second, a merger announcement is an event that implies an extensive analysis by investors on factors such as the target value, the potential synergies, the premium paid and the rest of conditions of the deal. Therefore, although investor inattention is less likely around this event, the level of inattention required to hamper the efficient processing of the merger information is also much lower than around less important events such as earnings announcements [
4].
The aim of this study is to analyze whether investor inattention affects the information processing of an unanticipated and complex corporate event such as an acquisition announcement. We considered not only the day of the week but also the time of the day (prior to the moment the market opens, during trading, after the market closes) of the corporate acquisition announcement. This day-time combination analysis extends previous research on mergers announcements and contributes to the analysis of strategic timing of the announcement of corporate acquisitions.
We employed a final sample of 265 all-cash acquisition announcements of listed and unlisted target firms released by listed Spanish firms from 1998 to 2018. We used all-cash acquisition for three reasons. First, previous studies found that, on average, investors do not react significantly to announcements of cash offers involving publicly owned targets, but they react positively and significantly to those involving privately owned targets [
12,
13,
14]. Targets’ private status is the single most important determinant of acquirers’ abnormal returns on cash acquisitions in the Spanish market [
15,
16,
17]. Second, and related to the former reason, cash acquisitions allowed us to avoid the interferences of the strategic behavior of overvalued companies engaged in stock-financed acquisitions [
5]. Third, the number of stock-financed acquisitions by listed Spanish firms was too small to consider the day-time combination in our analysis (37 stock or mixed financed acquisitions, as opposed to 268 all-cash acquisitions). We performed a joint analysis of day of the week and time of trade from both a univariate and a multivariate perspective, after controlling for several factors that were related to the market reaction to acquisition announcements. We found evidence consistent with the notion that investors are less attentive to Friday announcements than to non-Friday announcements, as we found a significant lower market reaction to acquisition announcements of unlisted target firms released during market trading hours in terms of both price and trading volume.
This study makes two important contributions to the literature related to both merger and acquisitions (M&A) and investor scrutiny. On the one hand, we show that the ample previous evidence that cash-financed acquisitions of unlisted firms are associated with wealth increases for bidders immediately after the announcement does not hold any longer when we introduce limited investor attention in the analysis. On the other hand, the combined analysis of the day and time the announcement is made introduces the notion of attention fluctuations along the trading day, thus enriching previous evidence on the inattention hypothesis around acquisition announcements. As far as we know, this is the first analysis of investor inattention taking into account the day of the week and time of the day combination of the corporate acquisition announcement.
The remainder of the article is structured as follows.
Section 2 presents the literature review and the hypotheses under study.
Section 3 describes the sample used and defines the variables. The methodology is presented in
Section 4. The results from the univariate and multivariate analyses are discussed in
Section 5 and
Section 6, respectively. Finally,
Section 7 presents the conclusions.
2. Literature Review and Hypotheses to Test
Investors’ attention plays an important role in the decision-making process and in the determination of asset prices. Traditional asset-pricing models imply that information revealed in the markets is analyzed by the investors and incorporated into prices through trading. The quantity or quality of information revealed, the knowledge of this information by all the investors, and the speed with which it is incorporated into prices determine the efficiency of the markets. In this regard, some anomalies have been detected together with investor behavioral bias that explain the incomplete or delayed responses of prices to new information.
The level of attention is a determinant factor in the incorporation of information into prices and in the decision-making process. Kahneman [
18] claimed that attention is a limited cognitive resource. Therefore, individuals are unable to monitor all the available information sources and attention determines the choice. Thus, individual preferences will determine decision-making [
19].
Previous psychology-based evidence on attention formed the basis for subsequent research on economics and finance [
18,
20]. As regards finance in particular, some authors have attempted to explain how investors’ attention affects the incorporation of information into prices. Peng and Xiong [
21] and Peng, Xiong and Bollerslev [
22] showed that limited attention affects the processing of information, since it leads investors to determine asset prices based more on market and industry information than on firm-specific information. Other authors have studied the impact of investors’ attention on trading. Thus, Barber and Odean [
19] showed that individual investors, unlike institutional investors, buy attention-grabbing stocks. Reyes [
23] observed a negative–positive attention asymmetry because retail investors are more attracted to negative stock market performance than to comparably positive performance. Kudryavtsev [
24] analyzed the incorporation of analyst recommendation revisions on prices and confirmed the presence of investor inattention principally for low capitalization firms and more volatile stocks. Peres and Schmidt [
25] showed that distracting news affects the limited attention of retail traders and determines their trading decision-making process.
One of the most significant developments in this area of research refers to the consequences of limited investor attention when new firm-specific information is released. The literature suggests that investors have a limited attention capacity and, consequently, underreact to corporate announcements. As a result, prices do not fully reflect all available public information. Nevertheless, Daniel et al. [
26] suggested that the limited attention of the investor causes investor credulity in processing information about new stock issuances. Most of the empirical evidence is based on the Friday effect, that is, the lower attention of investors to releases on Friday due to weekend distraction, which lowers the quality of their decision-making [
1].
Investor inattention due to the Friday effect has been investigated with regards to earnings and on mergers announcements. DellaVigna and Pollet [
1] found evidence of market inattention on Friday earnings announcements. They observed that the immediate response to Friday earnings announcements is less pronounced and that the post-earnings announcement drift is greater due to the delayed incorporation of the new information into prices. Conversely, De Haan, Shevlin and Thornock [
2] and Michaely, Rubin and Vedrashko [
3] did not find such evidence on earnings announcements. De Haan et al. [
2] did not find lower attention on Fridays. However, they observed that managers report bad earnings news after market hours, when market attention is expected to be lower. Michaely et al. [
3] analyzed the timing of the earnings release considering day-time combinations and observed that Friday evening is the period with the most negative earnings announcements. However, they showed that bad earning announcements on Friday owe to managers’ strategic timing: They exploit the trading opportunity since Friday news is not fully incorporated into prices.
Regarding merger announcements, Louis and Sun [
4] found evidence of the Friday effect. They found that, when the announcements are made on Fridays, the acquirers’ average abnormal return is less positive for stock finance acquisitions involving listed targets and less negative for those involving unlisted targets than on other days. They also observed a lower abnormal trading volume for Friday stock acquisitions than for non-Friday stock acquisitions. In this vein, trading volume is used as a measure of the investor’s degree of attention. Thus, Miller [
27] suggested that high trading volume implies that investors pay more attention. Gervais et al. [
28] argued that the increase in trading of a firm makes it more visible and exposes it to greater demand. Thus, the abnormal trading volume of announcements made on Fridays could be significantly lower than the abnormal trading volume of announcements made on the other days of the week.
Meanwhile, Michaely, Rubin and Vedrashko [
8] extended the analysis of the Friday effect to corporate news events other than earnings and merger announcements and included announcements of stock repurchases, seasoned equity offerings and dividend changes. Surprisingly, they observed that the initial limited reaction to Friday announcements disappears when the firm-selection bias is considered. They concluded that the different market reaction is due to the type of announcing firms but not to limited investor attention to Friday announcements. As to merger announcements, Adra and Barbopoulus [
5] showed that overvalued acquirers subject to limited attention are more likely to engage in stock acquisition of public firms and do not experience significant abnormal wealth losses. As a measure of investor attention, they employed the average daily percentage of the number of shares traded.
Following the idea that investor attention is low on Fridays and high on Mondays, Siganos [
7] observed that target firms experience a greater positive abnormal return on mergers announced on Mondays than on those announced on other days of the week, and that investors overreact to merger announcements on Mondays after daylight saving times. Glasner [
29] suggested that on Mondays, investors pay more attention to the market than on the other days.
Autore and Jiang [
9] analyzed whether investors are less attentive to preholiday announcements. They showed that limited attention to preholiday announcements does not drive the market reaction to the corporate events. Instead, they found that the effect of holiday mood, the optimism, is what drives investors to underreact to negative information and overreact to positive firm news. Likewise, Hood and Lesseig [
30] confirmed that investors are distracted around stock market holidays.
Reyes [
6] studied the relationship between investor attention and the merger performance of acquirers of public companies. The author found an increase in the level of investor attention around merger announcements. High attention of retail investors leads to an overvaluation of the acquirer’s stocks and to higher announcement returns. In contrast, high attention of sophisticated investors leads to a more precise market response to the merger announcement, resulting in a less marked overvaluation of the acquirer’s stocks and lower announcements returns. Reyes [
6] employed Google’s internet search volume index as a measure of level of attention. Google’s search index has also been employed in the study of the level of attention around earnings announcements. Ben-Rephael, Da and Israelsen [
10] found that high institutional attention facilitates the incorporation of information into prices on the announcement day, thus reducing the subsequent drift. In addition, using Google’s search index, Padungsaksawasdi, Treepongkaruna and Brooks [
31] found evidence of the importance of investor attention in asset pricing.
Based on the above evidence, we analyzed the existence of the Friday effect in the Spanish market resulting from the fact that investors get distracted by the weekend and pay less attention to merger announcements on that day. We included the timing of the announcement to perform a day-time analysis and considered three times of the day (before, during, and after trading hours). We analyzed the different market responses to Friday and non-Friday all-cash announcements. As we have pointed out above, we used all-cash acquisitions because ample prior evidence has shown that, on average, investors do not react significantly to announcements of cash offers involving publicly owned targets, but they react positively and significantly to those involving privately owned targets [
12,
13,
14]. In addition, cash acquisitions allowed us to avoid the interferences of the strategic behavior of overvalued companies engaged in stock-financed acquisitions [
5]. Therefore, the differential acquirers’ abnormal returns upon the announcements of cash acquisitions involving publicly owned and privately owned targets offered a natural setting to test whether the inattention hypothesis holds for acquisition announcements.
In the context of the above reasoning, the following hypotheses were formulated:
Hypothesis 1 (H1). Investors’ limited attention leads to lower abnormal returns and lower abnormal trading-volume activity for acquisition announcements made after the market closes.
Hypothesis 2 (H2). If the Friday effect applies and investors’ attention is limited on Friday, we expect lower abnormal returns and lower abnormal trading-volume activity for acquisition announcements made on Friday than for those made on non-Friday days.
7. Conclusions
Overwhelming previous evidence in the M&A literature has supported the idea that cash-financed acquisitions of unlisted firms are associated with wealth increases for bidders immediately after the announcement. As far as we know, this is the first study that shows that this result does not hold any longer when the limited investor attention on Friday is introduced in the analysis. Furthermore, the combined analysis of the day and time the announcement is made introduces the notion of attention fluctuations along the trading day.
Our empirical evidence of the existence of investors’ inattention to acquisition announcements came from a final sample of 265 all-cash acquisition announcements of listed and unlisted target firms released by Spanish listed firms over the period 1998–2018. We performed a joint analysis of day of the week and trading period from both univariate and multivariate perspectives. In focusing on cash-financed acquisitions, we avoided the interferences of the strategic behavior of overvalued companies in stock-financed acquisitions.
Consistent with the inattention hypothesis, we found that the acquirers’ average abnormal return for acquisitions of privately owned targets is positive and statistically significant any time of the day on all business days except on Fridays. As we pointed out before, this is a relevant result as it challenged the widespread belief based on previous evidence that bidders of cash-financed acquisitions of unlisted firms make gains irrespective of the characteristics of the deal, the bidder or the target firm. We showed that a key factor was missing from the former equation: equity investors being distracted by their weekend plans.
Furthermore, we found that the average abnormal trading volume during trading hours is significantly lower for Friday announcers than for non-Friday announcers. Interestingly, acquisition announcements of unlisted target firms made on Friday before the market opens (pre-market period) showed a significant abnormal trading volume, indicating that the announcements made before the market opens capture the investor’s attention better than those made during the rest of the day.
Consistent with the notion that investors are less attentive to Friday news, we found that acquirers’ abnormal trading volume of publicly owned targets was higher for all non-Friday announcements than for Friday announcements. This higher abnormal trading volume was concentrated in those announcements made before and after the trading hours, suggesting that investors perceive this sort of announcements to be of special interest. Therefore, our results suggest an attention fluctuation along the trading day. Nevertheless, the small size of these subsamples calls for caution in interpreting these results.
Our findings have several implications. First, they provide evidence of investors’ inattention around cash acquisition announcements of unlisted target firms released on Friday. From the company perspective, this result may be employed in order to hide acquisitions motivated not by value creation but by opportunistic or managerial reasons. Second, from the investor’s perspective, our results show the relevance of considering the day-time combination when making an announcement, due to the fluctuations in investor attention along the day.
Given the salience of our results, future research should address key questions like the sophistication of the investor. That is, we will explore from a market microstructure view whether this differential behavior we found is associated with changes in the balance between liquidity (retail) traders and sophisticated (institutional) traders.