Negative signals through the lack of communication

Sammanfattning: When new information about a company is released, the market factors this into the stock price. Information is however not always clear-cut. Sometimes markets react to signals instead of tangible information. In this paper failed mergers and acquisitions between 1991 and 2010 in the United States have been analyzed. The study has identified the reasons for the failure of a deal and specifically looked at the signaling effect sent to the market when the failure is a result of due diligence. It was found that the stock price of the target firms dropped dramatically and underperformed the market. The signal conveyed by due diligence failure is considered to be negative information. The study thereafter investigates how managers deal with communication and especially how negative information is released to the market. The interviewees general response was that a high degree of transparency leads to less negative signals and therefore inflicts less damage on a firm's credibility. When a merger or acquisition fails because of due diligence the lack of transparency and specified reason for withdrawal, suggests to the market that management is withholding negative information from the market.