M&As do not care about your feelings – or do they?

Abstract: Countless studies within M&As have examined factors that can explain bidding firms' abnormal returns, although, behavioral factors have mostly been overlooked. The aim of this study is to investigate the effect of investor sentiment on value creation around M&A deal announcements in the Nordic markets. We examine two, in principle, homogeneous samples of 421 and 359 acquisitions between May 2006 and December 2021. We find that a negative and statistically significant relationship exists between bidder announcement returns and the pre-announcement investor sentiment. The results are robust to including a number of control variables, which have shown explanatory power in prior research. We also find that M&A announcements during this period yield a positive cumulative abnormal return of 3.42% and 3.31% for (-1, +1) and (-3, +3) event windows centered on the deal announcement day, respectively. Furthermore, our sentiment index EUROfeelings constructed using principal component analysis proves to be adequate for capturing investor sentiment in Europe. In accordance with the managerial hubris hypothesis, our results indicate that bidding firms' managers are influenced by sentiment and overpay for targets during times of optimism.