A Study On Target Companys’ Market Reaction Of M&A Based On Behavioral Finance Theory

Recently state-owned enterprises reform makes investors rush into the M&A shares in the stock market. Due to this irrational sentiment of investors, the company’s shares after being merged is much higher than its real value. Through the empirical research on M&A market reaction in China, we find that the short-term stock price is rising and the market reaction is positive. But at the same time, this forward market reaction showed short-term, and then the stock price quickly fell. The traditional merger theories from different aspects, like the characteristics of target company, ownership structure, to explain this phenomenon, but can not explain fully. In recent years, behavioral finance has been modified to the traditional asset pricing theory, some scholars believe that the stock market price is more sensitive to the irrational traders’ investment behavior.So this paper studies the phenomenon using behavioral finance theory.Firstly we review the three main models of the investors behavior (BSV model, DHS model and HS model) and the investors’ specific irrational behavior. Secondly, based on the DHS model, analysis the dynamic relationship between investors’ behavior and the the market reaction of the M&A, and emphasis on the investors’ irrational behavior, and puts forward the research hypothesis.Finally, the event study method is used to calculate the M&A market reaction, and the relationship between the investors’ behavior and the market reaction was empirically tested.The empirical evidence suggests that M&A events for the target company brings significantly positive market reaction, but then often turn down soon; investors’ irrational behavior causes the change of the shares in the stock market mainly.