TY - JOUR
T1 - Rumors and pre-announcement trading
T2 - Why sell target stocks before acquisition announcements?
AU - Gao, Yuan
AU - Oler, Derek
PY - 2012/11
Y1 - 2012/11
N2 - 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 perceived 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.
AB - 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 perceived 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.
KW - Rumors
KW - Takeover announcements
KW - Trade reaction
UR - http://www.scopus.com/inward/record.url?scp=84867746942&partnerID=8YFLogxK
U2 - 10.1007/s11156-011-0262-z
DO - 10.1007/s11156-011-0262-z
M3 - Article
AN - SCOPUS:84867746942
SN - 0924-865X
VL - 39
SP - 485
EP - 508
JO - Review of Quantitative Finance and Accounting
JF - Review of Quantitative Finance and Accounting
IS - 4
ER -