The Impact of Investor Attention on M&A Announcement Target Returns

We investigate the impact of investor attention, proxied by Google search volume, on target abnormal returns and liquidity measures around M&A announcements. Investor attention slightly increases before and exhibits a sharp incline at the announcement date, with elevated levels of attention subsequent to the announcement. In line with common models of investor attention, we find that investor attention significantly and positively contributes to target abnormal returns at announcement date and leads to timelier incorporation of information, with potential leakage reducing abnormal returns on announcement date. We provide evidence of a share price anomaly as targets which do not attract attention at announcement date have median abnormal returns of more than 4% the following day. High and low attention at announcement date lead to over- and under-reaction in share price returns at announcement date, respectively, either of which is reversed over the subsequent month. Further, liquidity measures improve after M&A announcements, the decrease in bid-ask spread being significantly correlated with attention at announcement. These effects are more profound for smaller targets. The results are robust after controlling for relevant variables and causality concerns