Previous studies of stock market reactions to alliance announcements assume that investors accurately detect and encode these public statements, evaluate them with stable, well-established preferences, and that the signalling value of an announcement is independent of the context in which it is conveyed.This article draws on behavioural decision theory to advance a cognitive model of stock market reactions to the announcement of complex, multi-firm alliances. The model predicts a U-shaped relationship between the diversity of partners comprising the alliance and abnormal stock market returns. An empirical analysis of multi-firm alliances announced in the US between 2000 and 2004 corroborates the model's prediction. Moreover, the study shows that a firm's size and analyst coverage moderate the relationship between its alliance partners' diversity and its abnormal returns.These findings suggest that attentional selection and subsequent encoding processes produce cognitive biases in the interpretation of announcements and the market moves towards greater efficiency for large or high-coverage firms. Managers should thus take the effect of the `process of processing' into account when disclosing information to the investor community.
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