Institutional Trading in Firms Rumored to be Takeover Targets

In this paper we examine institutional trading in proximity to takeover rumors by combining the ANcerno dataset of transaction-level institutional trades with a unique sample of takeover rumor ‘scoops’. We find that institutions are net buyers in firms which subsequently become subject to takeover speculation and that institutional trading predicts which rumored firms will eventually receive takeover bids. Segregating funds according to their propensity to trade, we show that those less likely to purchase rumored targets by chance over the pre-rumor period are more likely to identify firms which will receive bid proposals and that they trade more profitably over both the pre- and post-rumor periods. We test for the presence of informed trading in a variety of ways and conclude that institutional investors appear to trade on material private information which identifies the firms soon to be the target of takeover speculation