Takeover rumors: returns and pricing of rumored targets

Rumors can be classified into two types according to whether they can credibly predict impending events. An analysis of takeover rumors of publicly US companies shows that the types of rumors are statistically distinguishable by the returns of the rumored targets before the publications of respective rumors. However, market responses to rumors on the day of and the day after the rumor's publication are statistically indifferent. Trading on takeover rumors can be profitable. Moreover, rumored targets display a different return pattern than other takeover targets, and their takeover premiums cannot be explained by the markup pricing or substitution hypothesis.