IDEAS home Printed from
MyIDEAS: Login to save this article or follow this journal

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

  • Yuan Gao


  • Derek Oler


Registered author(s):

    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

    If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

    File URL:
    Download Restriction: Access to full text is restricted to subscribers.

    As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.

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

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

    in new window

    Handle: RePEc:kap:rqfnac:v:39:y:2012:i:4:p:485-508
    Contact details of provider: Web page:

    References listed on IDEAS
    Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

    as in new window
    1. Lee, Charles M C & Ready, Mark J, 1991. " Inferring Trade Direction from Intraday Data," Journal of Finance, American Finance Association, vol. 46(2), pages 733-46, June.
    2. Jensen, Michael C. & Ruback, Richard S., 1983. "The market for corporate control : The scientific evidence," Journal of Financial Economics, Elsevier, vol. 11(1-4), pages 5-50, April.
    3. Crouch, R L, 1970. "A Nonlinear Test of the Random-Walk Hypothesis," American Economic Review, American Economic Association, vol. 60(1), pages 199-202, March.
    4. Jarrell, Gregg A & Poulsen, Annette B, 1989. "Stock Trading before the Announcement of Tender Offers: Insider Trading or Market Anticipation?," Journal of Law, Economics and Organization, Oxford University Press, vol. 5(2), pages 225-48, Fall.
    5. Malmendier, Ulrike & Shanthikumar, Devin, 2007. "Are small investors naive about incentives?," Journal of Financial Economics, Elsevier, vol. 85(2), pages 457-489, August.
    6. Eugene F Fama, . "Market Efficiency, Long-Term Returns, and Behavioral Finance," CRSP working papers 448, Center for Research in Security Prices, Graduate School of Business, University of Chicago.
    7. Cornell, Bradford & Sirri, Erik R, 1992. " The Reaction of Investors and Stock Prices to Insider Trading," Journal of Finance, American Finance Association, vol. 47(3), pages 1031-59, July.
    8. Mark Mitchell & Todd Pulvino & Erik Stafford, 2004. "Price Pressure around Mergers," Journal of Finance, American Finance Association, vol. 59(1), pages 31-63, 02.
    9. Trimbath, Susanne & Frydman, Halina & Frydman, Roman, 2001. " Cost Inefficiency, Size of Firms and Takeovers," Review of Quantitative Finance and Accounting, Springer, vol. 17(4), pages 397-420, December.
    10. Fama, Eugene F. & French, Kenneth R., 1993. "Common risk factors in the returns on stocks and bonds," Journal of Financial Economics, Elsevier, vol. 33(1), pages 3-56, February.
    11. Sanjeev Bhojraj, 2002. "Who Is My Peer? A Valuation-Based Approach to the Selection of Comparable Firms," Journal of Accounting Research, Wiley Blackwell, vol. 40(2), pages 407-439, 05.
    12. Thomas H. Eyssell & Nasser Arshadi, 1993. "Insiders, Outsiders, Or Trend Chasers?: An Investigation Of Pre-Takeover Transactions In The Shares Of Target Firms," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, vol. 16(1), pages 49-59, 03.
    13. Kandel, Eugene & Pearson, Neil D, 1995. "Differential Interpretation of Public Signals and Trade in Speculative Markets," Journal of Political Economy, University of Chicago Press, vol. 103(4), pages 831-72, August.
    14. Keown, Arthur J & Pinkerton, John M, 1981. "Merger Announcements and Insider Trading Activity: An Empirical Investigation," Journal of Finance, American Finance Association, vol. 36(4), pages 855-69, September.
    15. 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.
    16. Mark Mitchell, 2001. "Characteristics of Risk and Return in Risk Arbitrage," Journal of Finance, American Finance Association, vol. 56(6), pages 2135-2175, December.
    17. Gregor Andrade & Mark Mitchell & Erik Stafford, 2001. "New Evidence and Perspectives on Mergers," Journal of Economic Perspectives, American Economic Association, vol. 15(2), pages 103-120, Spring.
    18. Officer, Micah S., 2007. "Are performance based arbitrage effects detectable? Evidence from merger arbitrage," Journal of Corporate Finance, Elsevier, vol. 13(5), pages 793-812, December.
    19. Paul Draper & Krishna Paudyal, 1999. "Corporate Takeovers: Mode of Payment, Returns and Trading Activity," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 26(5&6), pages 521-558.
    20. Harris, Lawrence, 1986. "Cross-Security Tests of the Mixture of Distributions Hypothesis," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 21(01), pages 39-46, March.
    21. Karpoff, Jonathan M., 1987. "The Relation between Price Changes and Trading Volume: A Survey," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 22(01), pages 109-126, March.
    22. Meulbroek, Lisa K, 1992. " An Empirical Analysis of Illegal Insider Trading," Journal of Finance, American Finance Association, vol. 47(5), pages 1661-99, December.
    23. Michael Hertzel & Michael Lemmon & James S. Linck & Lynn Rees, 2002. "Long-Run Performance following Private Placements of Equity," Journal of Finance, American Finance Association, vol. 57(6), pages 2595-2617, December.
    24. Barnes, Paul, 1999. " Predicting UK Takeover Targets: Some Methodological Issues and an Empirical Study," Review of Quantitative Finance and Accounting, Springer, vol. 12(3), pages 283-301, May.
    25. Loughran, Tim & Vijh, Anand M, 1997. " Do Long-Term Shareholders Benefit from Corporate Acquisitions?," Journal of Finance, American Finance Association, vol. 52(5), pages 1765-90, December.
    26. Baker, Malcolm & Savasoglu, Serkan, 2002. "Limited arbitrage in mergers and acquisitions," Journal of Financial Economics, Elsevier, vol. 64(1), pages 91-115, April.
    27. Pound, John & Zeckhauser, Richard J, 1990. "Clearly Heard on the Street: The Effect of Takeover Rumors on Stock Prices," The Journal of Business, University of Chicago Press, vol. 63(3), pages 291-308, July.
    Full references (including those not matched with items on IDEAS)

    This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

    When requesting a correction, please mention this item's handle: RePEc:kap:rqfnac:v:39:y:2012:i:4:p:485-508. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Sonal Shukla)

    or (Christopher F. Baum)

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If references are entirely missing, you can add them using this form.

    If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.