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Institutional Investors’ Trading Behavior in Mergers and Acquisitions

Corporate Governance in the US and Global Settings

ISBN: 978-1-78441-292-0

Publication date: 14 November 2014


We investigate institutional investors’ trading behavior of acquiring firm stocks surrounding merger activities for the period 1992–2001. We label investment companies and independent investment advisors as active institutions and banks, nonbank trusts, and insurance companies as passive institutions. We analyze the trading behavior of active and passive institutions surrounding merger announcements and their eventual resolution. Our results indicate that active institutions significantly increase their holdings of acquiring firm stocks for mergers with higher announcement period abnormal return and this increase is more pronounced for stock mergers than cash mergers. Active institutions display preference for stock proposals at the merger announcement on the basis of their prior beliefs and this is explained by the “overreaction phenomenon.” However, they update their beliefs between announcement and final resolution as more information arrives into the market. Finally, active institutions appear to correct their overreaction behavior by displaying their greater preference for cash proposals as compared to stock proposals at the quarter of eventual outcome. The trading behavior of passive institutions suggests that these institutions disregard the market response of merger announcement in trading acquiring firm stocks at the announcement quarter. The passive institutions gradually update their beliefs and utilize the information released at the announcement in rebalancing their portfolios at the final resolution.




We would like to thank Jonathan Clarke, Cheol Eun, Ajay Khorana, Kalpana Narayanan, and participants at the Georgia Tech. Seminar for their useful comments. We also would like to thank the discussant Oliver Schnusenberg and participants of FMA 2005, discussant Ravi Jain and participants of ISB/CAF Winter Research Conference 2005, discussant Tom Berglund and participants of FMA 2006 European Conference, discussant Kai Li and participants of AFA 2007 meetings for their insightful comments. The usual disclaimer applies.


Ashraf, R. and Jayaraman, N. (2014), "Institutional Investors’ Trading Behavior in Mergers and Acquisitions", Corporate Governance in the US and Global Settings (Advances in Financial Economics, Vol. 17), Emerald Group Publishing Limited, Bingley, pp. 229-281.



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