Abnormal returns to rivals of acquisition targets: A test of the 'acquisition probability hypothesis'

We develop and test the Acquisition Pvobability Hypothesis, which asserts that rivals of initial acquisition targets earn abnormal returns because of the increased probability that they will be targets themselves. On average, rival firms earn positive abnormal returns regardless of the form and outcome of acquisition. These returns increase significantly with the magnitude of surprise about the initial acquisition, Moreover, the cross-sectional variation of rival abnormal returns in the announcement period is systematically related to variables associated with the probability of acquisition. In addition, rivals that subsequently become targets earn significantly higher abnormal returns in the announcement period. (C) 2000 Elsevier Science S,A. All rights reserved. JEL classification. G34; G14; G38; K21: G32.