Abstract

http://ssrn.com/abstract=502862
 
 

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Rumors and Pre-Announcement Trading: Why Sell Target Stocks Before Acquisition Announcements?


Yuan Gao


George Mason University - Finance Area

Derek Oler


Texas Tech University - Rawls College of Business

June 4, 2008


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 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.

Number of Pages in PDF File: 42

Keywords: Takeover announcements, rumors, price discovery, trade reaction

JEL Classification: G14, G34, G12, D82, D83

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Date posted: December 9, 2004 ; Last revised: August 17, 2012

Suggested Citation

Gao, Yuan and Oler, Derek, Rumors and Pre-Announcement Trading: Why Sell Target Stocks Before Acquisition Announcements? (June 4, 2008). Available at SSRN: http://ssrn.com/abstract=502862 or http://dx.doi.org/10.2139/ssrn.502862

Contact Information

Yuan Gao (Contact Author)
George Mason University - Finance Area ( email )
4400 University Drive
MSN 5F5
Fairfax, VA 22030
United States
703-993-1866 (Phone)
703-993-1870 (Fax)
Derek Oler
Texas Tech University - Rawls College of Business ( email )
P.O. Box 42101
Lubbock, TX 79409
United States
806-834-2354 (Phone)
806-742-3182 (Fax)
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