Does Investor Sentiment Drive M&As?

In this paper we investigate the relationship between firm-specific investor sentiment, measured by applying text analysis to news stories published by Thomson Reuters, and merger and acquisition (M&A) deals announced by US-listed companies between 1997 and 2018. We find that a more positive investor sentiment increases the probability of firms announcing acquisitions and we investigate a number of potential reasons capable of explaining such a relationship. In this respect, we do not find that the overvaluation hypothesis or the catering theory are able to account for the impact of investor sentiment on acquisition announcements. Instead, by studying the short- and long-run stock market reaction to merger announcements and its relationship with investor sentiment, we find a positive short-run correlation which is reversed in the long-run. These results provide evidence for the overoptimism theory of mergers, which states that, in periods characterized by more optimistic investor sentiment, managers are more induced to pursue acquisitions and that these are better perceived by the stock market, even though they perform worse in the long-run.