Date of Award
Doctor of Philosophy (PhD)
Business Administration - Finance
John A. Doukas
David D. Selover
Scholarly studies documented that stock price informativeness plays a critical role in market efficiency. In this dissertation, we participate this stream of literature by investigating the effects of stock price informativeness on the magnitudes of stock price momentum and the outcomes of corporate merger and acquisition decisions.
Essay 1 explores the effect of stock price synchronicity on momentum. The momentum anomaly is widely attributed to investor cognitive biases, but the trigger of cognitive biases is largely unexplored. In this study, inspired by psychology studies linking cognitive biases to the noisiness of information, we examine whether momentum returns are associated with high stock price synchronicity, a manifestation of noisy firm-specific information. Our results demonstrate that momentum is more pronounced in the presence of high stock price synchronicity. This finding is robust to other explanations and firm characteristics. We also find that stock price synchronicity boosts the profitability of momentum by amplifying investor underreaction to new information.
Essay 2 reconciles the conflicting findings of stock-price-noisiness based momentum by examining whether these findings are driven by different settings in three aspects: the sample filtering criterion, the holding strategy, and the sorting order. Our findings confirm this suspicion and show that, under appropriate settings, the results across different stock price noisiness measures imply a uniform relation between stock price noisiness and momentum returns. Specifically, momentum portfolios based on stocks with high-noise prices realize strong profits with no reversals, but momentum portfolios based on stocks with low-noise prices yield pronounced profits with significant subsequent reversals. These two momentum patterns reconcile the conflicting previous findings.
Essay 3 investigates whether managers learn from the private information in stock prices about the prospects of their own firms and use it to improve the efficiency of their merger and acquisition (M&A) decisions. Our results demonstrate that managers’ learning efficiency varies with managerial ability. Specifically, the interaction of managerial ability and stock price informativeness across acquirers explains acquiring firms’ probability of M&A initiation, variation in announcement abnormal returns, and post-M&A operating performance. We also find that skilled managers learn not only from the private information of their own firm’s stock price, but also from the target’s stock price. Our findings are robust to endogeneity concerns and show that the interactive effect of heterogeneity in managerial ability and stock price informativeness across acquirers predicts acquirers’ future stock price informativeness, consistent with the view that strong managerial ability facilitates a virtuous cycle between stock price efficiency and economic efficiency.
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"Three Essays on Stock Price Informativeness, Stock Price Momentum, and Firm Investment Efficiency"
(2022). Doctor of Philosophy (PhD), Dissertation, Finance, Old Dominion University, DOI: 10.25777/hmfw-vh67