Abstract

This paper examines the takeover rumour effects of potential U.S. acquisition targets on rival firms. On average, rival firms earn positive abnormal returns during the rumour period, despite the type and outcome of the rumour. Specifically, rumours concerning industry takeover activities and those regarding targets that undergo financial distress provide higher rival firm returns around the rumour date, while rumours that are seconded by analysts tend to lead to negative abnormal returns for rival firms. Rivals that subsequently become acquisition targets within one year following the rumour experience significantly higher abnormal returns. In related tests, we find that rumours proven to be credible, rumours denied by targets, rumours driven by insiders, rumours involving the PE finder, and rumours containing multiple informative signals are significant predictors of future rival acquisitions.