FT coverage and UK target price run-ups

Abstract

We focus on the market expectation hypothesis to explain the increase in share prices and trading volume of target firms before their merger announcements that have conventionally been attributed to either insider trading or market expectation. We use Financial Times (FT) coverage as a proxy of merger expectation and search for relevant articles for 783 UK target firms between 1998 and 2010. We identify a total of 1049 rumour articles and find that the FT market expectation proxy explains a small percentage of the target price run-ups. Results are strong during the sample period, even though the magnitude for both returns and trading volume tends to decrease within recent years. There is also a strong contemporaneous relation between abnormal returns and trading volume. Unexplained increases in target prices and trading volume may be attributed to insider trading.

Keywords:

• mergers and acquisitions
• target firms
• target price run-ups
• media coverage

Acknowledgements

We thank British Academy for their financial support. We are also grateful to Gillian MacIver for her support during data collection, to Jo Danbolt, Chris Veld and anonymous referees for valuable comments on the paper, and to FSA staff for an insightful discussion on the topic.

Notes

1. http://www.fsa.gov.uk/about/press/facts/fines (last accessed March 2014).

2. http://www.thetakeoverpanel.org.uk/wp-content/uploads/2008/11/transitionalarrangements.pdf (last accessed March 2014).

3. We use the Total Return Index (RI) data type that incorporates dividend payments in the estimation of returns. We use firm volume (VO) adjusted by the total number of outstanding shares to measure trading volume.

4. Note that our firms are not dead and the requirement of at least one non-zero return prior to merger announcements aims to exclude a few highly illiquid firms that may bias results.

5. No firms have volume data for all 250 days, and only 91 firms have all trading volume data between −60 and 0.

6. We employ the following terms: merg*, acqui*, target, takeover, rumour*, rumour*, buyout and bid*, where * indicates that the searched term should have the letters prior to the star, followed by any alternative ending.

7. In 103 targets, more than 20 articles are identified as relevant by NewsBank; as an example, in the search for merger activity of ‘Enterprise’ on 19 February 2007, 745 articles are identified as relevant. The large number of articles concerning the particular firm is due to the firm's name, with most articles irrelevant to rumours. To minimise the manual work required, we include the name of the bidding companies in the search.

8. The average market capitalisation of firms with a reported merger announcement is £356 million, and for those firms with rumours, £881 million.

9. As an example of a short rumour, Hume and Orr (2007, 40) report that ‘George Wimpey rose 3.4 per cent to 584p on vague bid rumours. Traders suggested that it could tie the knot with Taylor Woodrow, a rival, up 2.8 per cent to 410 1/4p’. George Wimpey plc was acquired by Taylor Woodrow plc on 26 March 2007.

10. http://www.fsa.gov.uk/Pages/Library/Communication/PR/2004/107.shtml (last accessed March 2014).

11. where N⁺ is the number of returns with positive abnormal returns and N is the total number of available returns.