We find that investors react more favorably to corporate announcements of share repurchases, SEOs, earnings, dividend changes, and acquisitions if the announcement is made immediately prior to or on holidays. These announcements are associated with more positive reactions for favorable events and less negative reactions for unfavorable events. This effect is robust to controls for market conditions and a selection bias, is accompanied by subsequent reversals, and is present in several international markets. Our findings suggest that predictable individual mood changes can cause biases in market reactions to firm-specific news.

We propose a behavioral signaling framework to explain the positive announcement effects of stock splits. (Retail) investors view stock splits as good news and are loss averse. Thus, a stock split can boost investors’ expectations of the firm’s growth potential and its stock price, but may also cause disproportionally larger price declines if the firm cannot meet investors’ high expectations. In equilibrium, only managers with favorable information use stock splits to signal. Empirical analyses of stock splits in China find supporting evidence for this explanation: (1) investors become more optimistic after stock splits; (2) higher split ratios are associated with stronger market reactions; (3) splitting firms have better future performance than non-splitting firms; and (4) they experience larger price declines when falling short of investors’ expectations. These findings, along with the unique institutional features of the Chinese market, help differentiate our behavioral explanation from alternative explanations within the rational framework.

This paper generalizes the Myers and Majluf (1984) model by introducing an agency cost structure based on private benefits of control. This new model predicts that many corporate finance variables each have opposing effects on under- and overinvestment. Private benefits exacerbate overinvestment but, interestingly, a small amount of private benefits can enhance firm value by alleviating underinvestment. Likewise, an increase in insider ownership alleviates overinvestment but aggravates underinvestment. When private benefits are small, the adverse effect of insider ownership on underinvestment tends to dominate. When there are considerable private benefits, the incentive-alignment effect of insider ownership is pronounced. Additionally, this model reconciles existing equity financing theories on announcement effects. It helps resolve the puzzle that small-growth firms do not seem to have an asymmetric information disadvantage when they issue new equity.

We explore the source of managerial hubris in mergers and acquisitions by examining the history of deals made by individual acquirers. We find that compared to their first deals, acquirers of second and higher-order deals experience significantly more negative announcement effects. We also find that while acquisition likelihood increases in the performance associated with previous acquisitions, previous positive performance does not curb the negative wealth effects associated with future deals. We interpret these results as consistent with self-attribution bias leading to overconfidence. We also find evidence that the market anticipates future deals based on an acquirer's acquisition history and impounds such anticipation into stock prices.