Overreaction to takeover speculation

Examination of 871 takeover rumors published in two columns of the Wall Street Journal during 1985 through 1988 reveals that the market reacts differently to report on the same page of the Journal. Rumors in the ''Abreast of the Market'' column are associated with short-term over-reactions, while those in the ''Heard on the Street'' column exhibit rapid price stabilization following rumor publication. Trading on these overreactions would have resulted in annualized excess returns averaging 20 percent with 70 percent of the trades being profitable. The degree of overreaction appears insensitive to target firm size, percentage of institutional ownership and market (beta) risk.