Do managers learn from the market? Firm level evidence in merger investment

• Published in: Finance research letters 2016-11, Vol.19, p.139-145
• Main Authors: Ouyang, Wenjing, Szewczyk, Samuel H.
• Format: Article
• Language: English
• Subjects: Managers learn from the market; Merger investments; Merger-investment-to-q sensitivity; Stock price firm-specific informativeness
• ISSN: 1544-6123; 1544-6131
• DOI: 10.1016/j.frl.2016.07.005

• Stock price firm-specific information increases the sensitivity of merger investments to Tobin's Q.• This relation holds with diverse measures of stock price informativeness.• This relation holds when including other information and firm related variables.• Firms with more informative stock prices achieve better post-merger operating performance.• New evidence on manager learning from the market in making merger investments. Chen, Goldstein, and Jiang (2007) first present direct evidence that managers learn from the market in internal capital investment decisions. This paper extends the research to merger investment. We report that stock price firm-specific information increases the sensitivity of merger investment to Tobin's Q. This relation is not driven by a particular subsample and is robust to diverse measures of stock price informativeness. It also holds when we control for related variables. Firms with more informative stock prices achieve better post-merger operating performance. Overall, these results suggest that managers learn new information from financial markets in making merger investment decisions.