Rumors of Mergers and Acquisitions : Market Efficiency and Markup Pricing

Rumors can be classified into two types, according to whether they can credibly predict impending events or not. The analysis of takeover rumors of publically traded US companies from 1990 to 2008 shows that these two types of rumors can be statistically distinguished by returns of rumored takeover targets before rumor publication. However, market responses to the rumors on the rumor day and the day after are statistically indifferent. Trading on such rumors can be profitable. Moreover, takeover premiums of sampled targets cannot be explained by markup pricing hypothesis although the hypothesis is supported by the view of efficient markets