Something happening in reaction to nothing

Prices reflect information. We tend to test this by looking at how the revelation of new information has an impact on prices, in particular on the stock market. But the fact that no information is being revealed may also be informative, and this could lead to price changes. The question is then whether market participants are attentive enough to notice no information is coming.

Stefano Giglio and Kelly Shue study this by checking on price changes after a merger or acquisition proposal has been revealed. Sometimes they are not getting finalized, and the longer nothing happens, the longer it should become clear the fusion is off. Thus, prices should, all else equal, revert to pre-announcement levels. Looking at 5000 mergers, they find that prices underreact to the absence of news. Either there is a behavioral issues, such as Bayesian updating not working properly when there is no event to update, or there could be a rational explanation in that risk exposure, frictions or asymmetric information issues could be changing as the merger proceeds (or not). Giglio and Shue cannot exclude any of these explanations but show that the behavioral one is certainly consistent with the data. That would mean that there are opportunities to make money lying out there...