Social Connections and Information Leakage: Evidence from Target Stock Price Run-Ups in Takeovers

Abstract

Does information leakage in a target’s social networks contribute to increase in its stock price prior to a merger announcement? Evidence reveals that a target with better social connections indeed experiences a higher pre-announcement price run-up. This effect does not exist during or after merger announcement, or in windows ending two months before the announcement. It is more pronounced among targets with severe asymmetric information, and weaker when public information about an upcoming merger is available prior to the announcement. It is also weaker in expedited deals such as in tender offers.

Keywords: Social networks, Target Runup, Information Leakage

JEL Classification: G34