Information Leakage Prior to Takeover Announcements: The Effect of Media Reports

There is considerable evidence documenting pre-bid price and volume reaction to takeover announcements. This has at times been argued to constitute evidence of insider trading. Although insider trading probably occurs, much pre-bid trading may result from event anticipation. This paper documents the effects of one source through which such anticipation is disseminated, namely the print media. Our results show that measures of unexpected returns and turnover can be reduced by one third when the information from media reports is controlled for. The general implication of our finding is that, if other such sources were taken into account (for example, information conveyed by substantial shareholder notices and the transactions costs of trading), then previous evidence of statistically significant unexpected pre-bid returns and turnover may be substantially reduced if not eliminated.