Timing of Mergers and Acquisitions: Evidence from the Canadian Stock Market

Abstract

This paper provides evidence of merger timing induced by investors’ overoptimism. We distinguish between hot and cold merger markets and examine the movements of bidding firms’ stock prices, around, before and after mergers announcements. Our results provide strong evidence that mergers are driven by stock market valuation and that these events occur during periods when investors are highly overoptimistic and react irrationally to a merger announcement. We find evidence that bidders’ managers are aware of the overvaluation of their firms and act rationally by timing their mergers and paying with stock. The market can however, correct itself when merger results start to appear.