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

42 Pages Posted: 9 Dec 2004 Last revised: 17 Aug 2012

Yuan Gao

George Mason University - Finance Area

Derek Oler

Texas Tech University - Rawls College of Business

Date Written: 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.

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

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

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: https://ssrn.com/abstract=502862 or http://dx.doi.org/10.2139/ssrn.502862

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)

Paper statistics

Downloads
660
Rank
30,752
Abstract Views
4,222