Origins of Rumors: Evidence from Disclosure and Insider Trading Regulation
This study investigates the economics and origins of capital market rumors, i.e. unconfirmed public news about potential deals. While prior literature suggests that rumored deals represent at least one-third of the aggregate value of the takeover market and that rumors are associated with intense capital market effects, little is known about the anonymous rumormongers and their intentions. We employ a staggered change in European securities regulation that increased the expected costs for spreading a rumor if the rumor is either hosted by a public acquirer or public target company. We find a reduction (no change) in rumored deals of about 40% to 50% if the target (acquirer) is located in a country that implemented the regulation. In cross-sectional analyses we find that this effect largely depends on strategic benefits of rumors in terms of takeover premium, takeover protection and insider trading. These results indicate that a significant number of rumormongers are hosted by the target company. They also indicate that
capital market rumors often constitute strategic misuse of private information, which should be of interest for capital market regulators. We contribute to the literature by providing initial evidence on sources of rumors.