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Rumors and pre-announcement trading: why sell target stocks before acquisition announcements?

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  • Yuan Gao

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  • Derek Oler

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    Abstract

    We track trading activity in the days preceding acquisition announcements for target firms and find that abnormally high trading volume precedes significant price movement. Using additional intraday data, we find increased active-selling in target stocks before acquisition announcements that offsets increased active-buying. This is unexpected because sellers often lose money when an acquisition is announced. After ruling out alternative explanations, we find evidence that sellers are rational investors who trade on the market’s perceived overreaction to takeover rumors. While sellers lose money when a rumor precedes an actual announcement, in most cases rumors fail to materialize into public announcements. We provide evidence that the significant pre-announcement volume we document reflects the market’s processing of highly uncertain information in takeover rumors. Copyright Springer Science+Business Media, LLC 2012

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    File URL: http://hdl.handle.net/10.1007/s11156-011-0262-z
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    Bibliographic Info

    Article provided by Springer in its journal Review of Quantitative Finance and Accounting.

    Volume (Year): 39 (2012)
    Issue (Month): 4 (November)
    Pages: 485-508

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    Handle: RePEc:kap:rqfnac:v:39:y:2012:i:4:p:485-508

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    Web page: http://springerlink.metapress.com/link.asp?id=102990

    Related research

    Keywords: Takeover announcements; Rumors; Trade reaction; G14; G34; G12; D82; D83;

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    Cited by:
    1. Kedia, Simi & Zhou, Xing, 2014. "Informed trading around acquisitions: Evidence from corporate bonds," Journal of Financial Markets, Elsevier, vol. 18(C), pages 182-205.

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