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Clearly Heard on the Street: The Effect of Takeover Rumors on Stock Prices

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  • Pound, John
  • Zeckhauser, Richard J

Abstract

This article examines the effects of takeover rumors on stock prices using a sample of rumors published in the WALL STREET JOURNAL's "Heard on the Street" column. We find that the market reacts efficiently to rumors; simple trading strategies based on buying or selling rumored targets' stocks yield zero excess returns. We document a significant price run-up for rumored targets in the month before publication of the takeover rumor. We find that widespread takeover rumors accurately predict imminent takeover bids less than half the time. Finally, we find that most takeover rumors are preceded by unusual price and volume activity in the stock of the rumored target, which may stimulate speculation that a large block position is being accumulated. Copyright 1990 by the University of Chicago.

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Bibliographic Info

Article provided by University of Chicago Press in its journal Journal of Business.

Volume (Year): 63 (1990)
Issue (Month): 3 (July)
Pages: 291-308

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Handle: RePEc:ucp:jnlbus:v:63:y:1990:i:3:p:291-308

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Web page: http://www.journals.uchicago.edu/JB/

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Cited by:
  1. Ajeyo Banerjee & E. Woodrow Eckard, 2001. "Why Regulate Insider Trading? Evidence from the First Great Merger Wave (1897-1903)," American Economic Review, American Economic Association, vol. 91(5), pages 1329-1349, December.
  2. Boyan Jovanovic & Serguey Braguinsky, 2002. "Bidder Discounts and Target Premia in Takeovers," NBER Working Papers 9009, National Bureau of Economic Research, Inc.
  3. G. William Schwert, 1996. "Mark-Up Pricing in Mergers and Acquisitions," NBER Working Papers 4863, National Bureau of Economic Research, Inc.
  4. J. David Cummins & Christopher M. Lewis, 2002. "Catastrophic Events, Parameter Uncertainty and the Breakdown of Implicit Long-term Contracting in the Insurance Market: The Case of Terrorism Insurance," Center for Financial Institutions Working Papers 02-40, Wharton School Center for Financial Institutions, University of Pennsylvania.
  5. Zivney, Terry L. & Bertin, William J. & Torabzadeh, Khalil M., 1996. "Overreaction to takeover speculation," The Quarterly Review of Economics and Finance, Elsevier, vol. 36(1), pages 89-115.
  6. Michael R. King & Maksym Padalko, 2005. "Pre-Bid Run-Ups Ahead of Canadian Takeovers: How Big Is the Problem?," Working Papers 05-3, Bank of Canada.
  7. Udomsirikul, Prasit & Jumreornvong, Seksak & Jiraporn, Pornsit, 2011. "Liquidity and capital structure: The case of Thailand," Journal of Multinational Financial Management, Elsevier, vol. 21(2), pages 106-117, April.
  8. Kosfeld, Michael, 2005. "Rumours and markets," Journal of Mathematical Economics, Elsevier, vol. 41(6), pages 646-664, September.
  9. Asquith, Daniel & Kieschnick, Robert, 1999. " An Examination of Initial Shareholdings in Tender Offer Bids," Review of Quantitative Finance and Accounting, Springer, vol. 12(2), pages 171-88, March.
  10. Marcus Clements & Harminder Singh & Antonie Van Eekelen, 2007. "Trading in Target Stocks Before Takeover Announcements: An Analysis of Stock and Option Markets," Accounting, Finance, Financial Planning and Insurance Series 2007_20, Deakin University, Faculty of Business and Law, School of Accounting, Economics and Finance.

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