R umors of Mergers and Acquisitions: Market Efficiency and Markup Pricing

1. Rumors of Mergers and Acquisitions: Market Efficiency and Markup Pricing －－ Hsin-I Chou, Gloria Y. Tian, Xiangkang Yin

2. Rumors, Not-Just-Rumors…, or Good Rumors • 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.

3. White Cat, Black Cat…, or Good Cat • “I don't care if it's a white cat or a black cat. It's a good cat so long as it catches mice.” (Deng Xiao Ping, 1961) • … being economically successful is more important than being loyal to any particular ideology.

4. Sources of Rumors • Public Speculation vs. Insider Leaks • Market Tells: Pre-Rumor winners indicate real takeovers likely pending • But this cannot be the direct evidence of insider leaks. It could be also possible that the market has a good speculation.

5. Rumors of Market Speculation… Naturally • Prior to the 1998 Thanksgiving release of A Bug's Life, rumor was spreading around about the potential for the film. • Upon this speculation, Pixar's stock rose from a low of $20 a share at the beginning of 1998 to $53 right before the film opened. • When A Bug's Life did open, it indeed broke all the box-office records for an animated film opening on Thanksgiving weekend. • And yet the stock quickly lost about 40 percent of its value over the next month. • Several months later, it is still substantially below its November 1998 price.

6. Buy the Rumor, Sell the News? • M&A Rumors: Public Speculation vs. Insider Leaks • Rumors of no insiders: New films, new products, new solutions, etc… the consumer is the final judge. • Would buying the rumor, selling the news still be a profitable strategy?

7. FIGLEWSKI (2010) • Stephen FIGLEWSKI of NYU Stern School of Business (2010): The Impact of the Federal Reserve's Interest Rate Target announcement on Stock Prices: A Closer Look at How the Market Impounds New Information • The FED announces its new interest rate target while the stock market is open, at precisely 2:15 P.M. eight times a year. • In the EMH, an information shock is impounded in prices immediately and accurately as soon as it becomes public knowledge, and only the unanticipated portion moves prices. (SIZE of takeover deal announcements) • Responding accurately to news requires investors to judge how much other investors have been surprised and how their investment decisions will be affected, so how the market responds to the news generates additional information to be digested and acted upon.

8. FIGLEWSKI (2010) • This suggests that the full process of returning to equilibrium after an information event can not be instantaneous. • The paper explores the "informational microstructure" of the stock market around Fed funds target announcements by examining the market's risk neutral probability density for future stock prices, extracted from real-time option prices using a non-model dependent procedure. The results show that the market's adjustment to the news continues well beyond the initial information release.

9. Missing Data? • Table 4 reports various empirical models with various sample size. • Whether missing observations are missing completely at random (MCAR), missing at random (MAR), missing not at random (MNAR) could matter. • Little’s MCAR test is suggested.

10. Finally… • Are Findings Universal? • Pound & Zeckhauser (1990) • Data comparable? • Personally… • Long-term investment vs. Short-term trade