Clearly Heard on the Street: The Effect of Takeover Rumors on Stock Prices

This article examines the effects of takeover rumors on stock prices using a sample of rumors published in the WALL STREET JOURNAL's "Heard on the Street" column. We find that the market reacts efficiently to rumors; simple trading strategies based on buying or selling rumored targets' stocks yield zero excess returns. We document a significant price run-up for rumored targets in the month before publication of the takeover rumor. We find that widespread takeover rumors accurately predict imminent takeover bids less than half the time. Finally, we find that most takeover rumors are preceded by unusual price and volume activity in the stock of the rumored target, which may stimulate speculation that a large block position is being accumulated.