Overnight Trading around Mergers and Acquisitions: Investor Sentiment or Investor Attention?

What are the behavioural characteristics of overnight returns? Unlike prior literature, we unveil that overnight trading activity exhibits behavioural elements of an investor attention rather than an investor sentiment measure. Overnight returns are employed as a proxy of investor sentiment, and absolute overnight returns are used a proxy of investor attention. Using mergers and acquisitions as a theoretical testing framework, we find that pre-acquisition announcement absolute overnight returns are positively associated with bidder short-run performance for acquisitions of private targets paid with stock and negatively associated for acquisitions of
public targets paid with stock. The market overreaction is stronger for harder-to-value deals and those with lower institutional ownership, while it is reversed in the long run. This evidence is in line with the predictions of the investor attention hypothesis. There is no relationship between pre-acquisition announcement overnight returns and bidder short-run performance.