Project Start:08/2016
Researchers:Alexander Hillert, Anja Kunzmann, Stefan Ruenzi
Area: Financial Markets
Funded by:LOEWE

Topic and Objectives

Studies on investor attention and stock markets find that increases in investor attention may cause temporary mispricing of stocks. Da et al. (2011) show that increases in investor attention predict a short-term price continuation which is followed by a return reversal. Hillert et al. (2014) find that the momentum anomaly is most pronounced among stocks with high excess media coverage which suggests that investors overreact to news. Lou (2014) shows that changes in firms' advertising expenditures are positively (negatively) associated with contemporaneous (future) stock returns. Focke et al. (2020) find that increases in advertising catch investors’ attention and are associated with higher trading volume but not with higher returns.

In this project, we test whether and how firms exploit advertising-induced investor attention effects in the context of M&A transactions. More specifically, we employ a novel dataset of daily print and TV product market advertising to analyze the strategic use of advertising in M&A transactions.

Key Findings

  • Acquiring firms increase their product market advertising significantly in the first five to ten days after announcing a stock-financed acquisition. This evidence is consistent with managers trying to temporarily boost their firms’ stock prices to use their firms’ overvalued equity to acquire the target.

  • In contrast to stock-financed acquisitions, there are no significant changes in acquiring firms’ advertising spending around cash-financed acquisitions.

  • The increase in acquiring firms’ advertising after the takeover announcement does not predict a lower takeover premium. I.e., the strategic use of advertising does not allow acquirers to take over targets more cheaply.

  • However, higher acquiring firms’ advertising spending is positively related to the probability of a successful deal completion. Thus, the use of product market advertising in M&A transactions might still be beneficial for acquiring firms.

  • For M&A targets, there are no significant and robust changes in advertising spending around the takeover announcement. Thus, there is no evidence that acquisition targets use product advertising as a takeover defense mechanism.

Please note that these findings are based on a preliminary data set from the Kantar advertising database.

Policy Implications

  • Our findings show that firms/managers might use tools that seem not to be directly related to financial markets (in our case product market advertising) to strategically influence the outcome of major corporate events (in our case M&As). Regulators may want to explore such mechanisms further to assure that financial markets are not affected by opportunistic firm/manager behavior.

Related Published Papers

Mohamed Al Degwy, Matthias ThiemannVon mikro- zu makroprudenzieller Regulierung
Die Innenwelt der Ökonomie: Wissen, Macht und Performativität in der Wirtschaftswissenschaft (Springer)
2016 Financial Markets Banking Regulation, Systemic Risk, Formalism, Equilibrium Thinking, Discourse, Citation Network Analysis