Overreaction to Merger and Acquisition Announcements

Paper linkhttp://english.ckgsb.edu.cn/sites/default/files/files/Merger_Anomaly_20150417.pdf

This strategy trades NYSE, AMEX, and Nasdaq stocks around merger and acquisition (M&A) announcements. It shorts targets with initial target prices (ITP) in the highest decile and goes long on those in the lowest decile, holding positions equally weighted for two months to exploit valuation extremes.

The ITP ratio captures investor expectations of deal success. High ITP ratios often reflect overreaction and predict negative abnormal returns, while low ratios suggest underreaction. This makes ITP a useful signal for trading around M&A deals.