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Textual properties of merger and acquisition press releases

The market for merger and acquisition (M&A) transactions is enormous with volume exceeding $5 trillion in 2021. The propensity for M&As to be value destructive has puzzled researchers for many years. Conceptually, two firms should merge when their combination adds value to shareholders but scholars also attribute M&A activity to managerial self-serving incentives.

Prior empirical studies focus on the economic effects around the initial M&A plan announcement. Our understanding of how firms actively manage their media coverage is scant even though M&A press releases are known to be fundamentally important to avoid a negative market reaction.

What is not known is whether the choice of words in M&A PR conveys additional information about the fundamentals of the proposed deals for acquirer and target firms or if the narrative disclosures may lose utility or obfuscate issues with writing styles that are confusing, distracting or perplexing to readers.

We explore the information content of M&A PRs using short-term cumulative abnormal returns (CAR) and abnormal trading volumes (ATVs) around the M&A press release. We expect managers who are confident that a deal will add value to use clear and simple language to convey their confidence to the market. In contrast, managers who propose deals for self-serving purposes are more likely to use complex wording in an attempt to obfuscate the real reasons for proposing the M&A. Finding that investors react more positively to clearer and positive wording is consistent with this conjecture. However, since M&As are relatively infrequent but have significant economic consequences, the competing hypothesis is they are very closely watched and analyzed, thus leaving little room for textual properties to influence the market reaction. If so, we do not expect the clarity or tone of the PR to have strong pricing implications.

Our research aims to evaluate the informativeness of the textual properties of M&A PRs which managers use to convey their beliefs of the merits of proposed combinations. We contribute to the emerging and growing literature that analyzes the information content of the language and text used in financial disclosures. 

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Accounting and Auditing - Investigating current issues in accounting that include financial reporting, assurance, corporate governance, corporate social responsibility and business models in large and small business entities

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Project last modified 11/03/2022