Assimilation Effects in Financial Markets

Guosong Xu, Eliezer Fich

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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other distortions as more positive surprises are related to increases in bid competition, takeover premiums, and withdrawn M&As.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.

Original languageEnglish
Pages (from-to)2890-2927
Number of pages38
JournalJournal of Financial and Quantitative Analysis
Issue number7
Publication statusPublished - 11 Nov 2023

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