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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.

Suggested Citation

  • 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.
  • Handle: RePEc:ucp:jnlbus:v:63:y:1990:i:3:p:291-308
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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. Siganos, Antonios, 2013. "Google attention and target price run ups," International Review of Financial Analysis, Elsevier, vol. 29(C), pages 219-226.
    3. Chou, Hsin-I & Li, Baibing & Yin, Xiangkang & Zhao, Jing, 2017. "Variables in dollar terms versus in rate terms: The case of market feedback on merger negotiations," International Review of Financial Analysis, Elsevier, vol. 49(C), pages 138-145.
    4. Richard J. Zeckhauser & John Pound, 1990. "Are Large Shareholders Effective Monitors? An Investigation of Share Ownership and Corporate Performance," NBER Chapters,in: Asymmetric Information, Corporate Finance, and Investment, pages 149-180 National Bureau of Economic Research, Inc.
    5. Kosfeld, Michael, 2005. "Rumours and markets," Journal of Mathematical Economics, Elsevier, vol. 41(6), pages 646-664, September.
    6. Boyan Jovanovic & Serguey Braguinsky, 2004. "Bidder Discounts and Target Premia in Takeovers," American Economic Review, American Economic Association, vol. 94(1), pages 46-56, March.
    7. Yuan Gao & Derek Oler, 2012. "Rumors and pre-announcement trading: why sell target stocks before acquisition announcements?," Review of Quantitative Finance and Accounting, Springer, vol. 39(4), pages 485-508, November.
    8. Chou, Hsin-I & Tian, Gloria Y. & Yin, Xiangkang, 2015. "Takeover rumors: Returns and pricing of rumored targets," International Review of Financial Analysis, Elsevier, vol. 41(C), pages 13-27.
    9. repec:spr:chfecr:v:5:y:2017:i:1:d:10.1186_s40589-017-0052-4 is not listed on IDEAS
    10. Schwert, G. William, 1996. "Markup pricing in mergers and acquisitions," Journal of Financial Economics, Elsevier, vol. 41(2), pages 153-192, June.
    11. 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.
    12. 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.
    13. Ali Akyol & Jin S. Kim & Chander Shekhar, 2014. "The Causes and Consequences of Accelerated Stock Repurchases," International Review of Finance, International Review of Finance Ltd., vol. 14(3), pages 319-343, September.
    14. Michael R. King, 2009. "Prebid Run-Ups Ahead of Canadian Takeovers: How Big Is the Problem?," Financial Management, Financial Management Association International, vol. 38(4), pages 699-726, December.
    15. Philip Brown & Andrew Ferguson & Andrew B. Jackson, 2009. "Pierpont and the Capital Market," Abacus, Accounting Foundation, University of Sydney, vol. 45(2), pages 147-170.
    16. 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.
    17. repec:eee:ecofin:v:42:y:2017:i:c:p:1-19 is not listed on IDEAS
    18. Haizhen Wang & Ratthachat Chatpatanasiri & Pairote Sattayatham, 2017. "Stock Trading Using PE ratio: A Dynamic Bayesian Network Modeling on Behavioral Finance and Fundamental Investment," Papers 1706.02985, arXiv.org.
    19. DiFonzo, Nicholas & Bordia, Prashant, 1997. "Rumor and Prediction: Making Sense (but Losing Dollars) in the Stock Market," Organizational Behavior and Human Decision Processes, Elsevier, vol. 71(3), pages 329-353, September.
    20. 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 171-188, March.
    21. Saif Ullah & Nadia Massoud & Barry Scholnick, 2014. "The Impact of Fraudulent False Information on Equity Values," Journal of Business Ethics, Springer, vol. 120(2), pages 219-235, March.

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