Takeover Rumors: Returns and Pricing of the Rumored Targets

56 Pages Posted: 15 Mar 2012 Last revised: 25 Sep 2015

See all articles by Hsin-I Chou

Hsin-I Chou

University of Otago - Department of Accountancy and Finance

Gloria Yuan Tian

University of Lethbridge Calgary Campus; Financial Research Network (FIRN)

Xiangkang Yin

Deakin University; Financial Research Network (FIRN)

Date Written: May 13, 2015

Abstract

Rumors can be classified into two types according to whether they can credibly predict impending events. Our analysis of takeover rumors of publicly traded US companies shows that public information on a rumored takeover target, particularly its historical Cumulative Abnormal Return (CAR) before initial rumor’s publication, is indicative of whether the pending takeover will be materialized. To our knowledge, this predictive power of historical CAR for the takeover rumor credibility has not been documented in the prior literature. However, abnormal returns on the day of and the day after the rumor’s publication are statistically indistinguishable between the two groups, although the groups can be distinguished by their historical CARs. This suggests that the market overreacts to takeover rumors that will not be materialized. Furthermore, trading on rumors is profitable if an investor invests selectively according to the historical CARs of rumored targets. The profitability of this trading strategy is in contrast to what has been documented in the prior literature. It is also found that rumors have substantial impacts on stock prices in takeover processes, leading to a relationship between takeover premium and price runup that differs from those revealed by previous studies. For the rumored targets, the projection of takeover premium on the stock price runup tends to be strictly greater than one, suggesting that bidders pay takeover targets “twice” because of revising the takeover offer upwards more than the runup. The difference between our finding and those of previous studies, such as the markup pricing or substitution hypothesis, suggests that the very existence of takeover rumors can have some material impact on bidders’ pricing strategies and the final realization of takeover premiums.

Keywords: Takeover rumor, merger and acquisition, runup, markup, takeover premium

JEL Classification: G14, G34

Suggested Citation

Chou, Hsin-I and Tian, Gloria Yuan and Yin, Xiangkang, Takeover Rumors: Returns and Pricing of the Rumored Targets (May 13, 2015). Chou, H.-I., Tian, G.Y. & Yin, X., Takeover Rumors: Returns and Pricing of Rumored Targets, International Review of Financial Analysis (2015). Available at SSRN: https://ssrn.com/abstract=2021769 or http://dx.doi.org/10.2139/ssrn.2021769

Hsin-I Chou

University of Otago - Department of Accountancy and Finance ( email )

PO Box 56
Dunedin, 9054
New Zealand

Gloria Yuan Tian

University of Lethbridge Calgary Campus ( email )

6th floor, 345 - 6 Ave SE
Calgary, Alberta T2G 4V1
Canada

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

HOME PAGE: http://www.firn.org.au

Xiangkang Yin (Contact Author)

Deakin University ( email )

Melbourne, Victoria
Australia

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

HOME PAGE: http://www.firn.org.au

Register to save articles to
your library

Register

Paper statistics

Downloads
219
Abstract Views
1,404
rank
137,038
PlumX Metrics