Investor Reaction to Merger and Acquisition Rumors

41 Pages Posted: 23 Jul 2016

See all articles by Matthew Ma

Matthew Ma

Southern Illinois University at Carbondale

Feng Zhang

University of Utah - Department of Finance

Date Written: July 2016

Abstract

We investigate investor reactions to merger and acquisition rumors. Employing a large and comprehensive sample of acquisition rumors, we find that the rumor target firms experience average cumulative abnormal returns of 4.78% over the three days around the rumor, and abnormal returns of -4.48% over the following three months. The negative post-rumor abnormal returns are robust to different benchmark return models, firm size, level of illiquid, and level of idiosyncratic risk. Additional tests indicate that they are not driven by omitted risks or changing risks over time. The acquisition rumors attract tremendous investor attention; the more attention they attract the more negative are the post-rumor returns. Our findings are consistent with that investors overreact to acquisition rumors.

Keywords: rumor, mergers and acquisitions, overreaction, investor attention

JEL Classification: G14; G34

Suggested Citation

Ma, Matthew and Zhang, Feng, Investor Reaction to Merger and Acquisition Rumors (July 2016). Available at SSRN: https://ssrn.com/abstract=2813401 or http://dx.doi.org/10.2139/ssrn.2813401

Matthew Ma

Southern Illinois University at Carbondale ( email )

Rehn Hall - Mail Code 4626
Carbondale, IL Illinois 62901-4515
United States

Feng Zhang (Contact Author)

University of Utah - Department of Finance ( email )

David Eccles School of Business
Salt Lake City, UT 84112-9303
United States

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