Industry peers stock liquidity and M&A

This study examines the impact of mergers and acquisitions on the liquidity of shares of industry peers of the target firm. The results document, on average, an improvement in the liquidity of industry peer firms' shares: bid-ask spreads of industry peers decline, the Amihud illiquidity measure declines, and their trading volumes increase around the merger announcement relative to a control sample. Industry peers of the target firm experience significant cumulative abnormal returns (CARs) that are increasing with the improvement in liquidity of the firms' shares. Our findings are consistent with the notion that the publicity and attention around the announcement of an acquisition involving a close industry peer results in benefits arising from increased liquidity of shares and offers a possible explanation for the positive CARs experienced by industry peers of the target firm around merger announcements.