Investor Reaction to Merger and Acquisition Rumors

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