MARKET REACTIONS TO TARGET MERGERS AND ACQUISITION RUMORS

AS EVIDENCED BY CHINA

Student Name

University Details

Professor Details

Date

January, 2023 1
 Acknowledgement

Completing this dissertation is a significant achievement for me in my academic career. It

has been a great blessing for me to be able to discover ideas and concepts that I would never

have been able to understand if I had not dedicated a significant amount of time and effort to

doing the necessary research. I am indebted to many individuals who have mentored and

encouraged me during the research process and assisted me with my endeavour, and for that, I

am thankful.

In the earliest possible stage, I'd want to convey my appreciation to my instructor,

____________, who assisted me in narrowing down potential topics for my study and ultimately

deciding on one. My adviser was there throughout the whole of the proposal's preparation on my

end and the process of conceptualizing how it would be organized. With their assistance and

your help, I could complete the study task and attain the same level of understanding. I could put

together and complete the dissertation thanks to the advice and directions they provided.

In addition, to anyone it may concern, please accept my sincere thanks to all of my

previous professors and lecturers, who, over the whole of my academic career, have supported

me and inspired me to have faith in my capabilities. They have helped guide me through various

challenges, which has ultimately enabled me to achieve this success.

In conclusion, my family has been a tremendous source of encouragement and the

mental, spiritual, and emotional support I need to finish my thesis. They have been there for me

every step of the way in my dissertation and have been tremendous assistance. For everything

that they've done, I will be forever thankful.

January, 2023 2
 Abstract

Within the scope of this research study, I investigated how investors/mergers on China's

stock exchanges reacted to reports of publicly traded companies' takeovers between 2004 and

2014 when such announcements were made. In particular, I investigated these investors'

responses to the announcements made by the businesses that were subsequently bought. This

period spans years, starting with the first day of trading on China's stock exchanges and ending

with the last day of trading in 2014. In 2014, trading on China's stock exchanges was suspended

due to regulatory reforms. Both of these dates fall within this time frame. Due to the completion

of many regulatory reforms in 2014, trading was halted on China's stock exchanges.

The Chinese stock exchanges began their operations in 1999. It began on the first day

that stocks were exchanged on China's stock exchanges and lasted until the very last day that

trading took place in 2014. This period encompasses the years beginning with the first day of

trading on China's stock exchanges and the last day of trading in 2014.

This specific period evaluates everything that occurred between 2004 and 2014 and

considers the full scope of everything that occurred. We find pre-rumour market overreaction

helps state-owned firms with unusually high returns the most as merger-and-acquisition (M&A)

targets. Even though we believe it is still the best, we find pre-rumour price increases for M&A

targets with odd returns, and this is still the case. This is true regardless of whether we

implement price increases. Candidates with atypical returns. This is true regardless of whether or

not we implement price increases. This illusion is unaltered in any way. The fact that we may or

may not come across any strange results has no bearing on the fact that this is always the case,

regardless of the circumstances. This is the truth no matter what the conditions are, and it does

January, 2023 3
not matter whether or not we encounter any consequences that are not reasonable. This continues

to be the case despite all that has happened.

Even though we could or might not have any abnormal outcomes, this is the reality.

Even though we may or might not find any unusual outcomes, this is still the case. This is the

case even though we often encounter both of these things. Despite this fact, the situation has not

changed. (SOEs). There is no evidence of any significant abnormal returns for the rumour of an

M&A transaction target during a 41-day event window that begins on day 20 and continues until

day 20 plus 20, including a period that begins on day 20, which includes a period that begins on

day 20.

The commencement of it may be on the 20th day. The twenty-first day is a significant

landmark since it marks both the beginning and the end of this window of opportunity. As a

result, this day is significant. Despite this, the reactions on the stock market to genuine rumours

are more significant than the reactions on the market to fake rumours, which suggests that

investors are typically able to differentiate between the two separate kinds of reports. In

conclusion, we give evidence that stated objectives with higher institutional ownership have

lower market reactions.

This finding lends credence to the contention that this conclusion is correct. In addition,

there is a significantly increased degree of institutional ownership in the firms that are the subject

of the discourse. This is something that is currently taking place. Place. These companies have

been the focus of speculation and rumours. It is easy to see when you look at the percentages of

ownership in each corporation.

January, 2023 4
 There is an increased risk of bankruptcy for companies owned by a more significant

number of institutional investors, the subject and have been of unfounded rumours regarding

another company, as the findings of several studies have found. These rumours may concern the

possibility of the business being acquired by another company. The current state of affairs has

remained the same despite this fact. This is still the case despite everything that has occurred in

the history of the recent past.

January, 2023 5
 Table of contents
Acknowledgement 2
Abstract 3
CHAPTER ONE 7
1.1 Introduction 7
1.1.1 Brief Overview of the Research Study 7
1.1.2 Background and Significance of the Research Study 7
1.1.3 Review of Literature and Hypothesis of the Research Study 10
1.1.3.1 Cost increases before a public announcement 11
1.1.3.2 Profiting from speculation regarding potential mergers and acquisitions is an excellent way
to make money. 11
1.1.3.3 The long and winding history of mergers and acquisitions in China, which has been
convoluted and drawn out 12
CHAPTER TWO 13
2.1 Research Methodology 13
2.2 Data sources for the Research Study 14
2.3 Research Study Design 15
2.4 Statistical Analysis 16
2.5 Sample selection 17
2.6 Sample description 20
CHAPTER THREE 21
3.1 Results and Analysis of the Research Study 21
3.2 Empirical Evidence of market reactions to target M&A rumours in china 22
3.3 Analysis of factors influencing market reactions 24
CHAPTER FOUR 26
4.1 Analysis and Discussion 26
CHAPTER FIVE 57
5.1 Conclusions 57
CHAPTER SIX 58
6.1 Recommendations 58
References List 59

January, 2023 6
CHAPTER ONE

1.1 Introduction

1.1.1 Brief Overview of the Research Study

"Market Reactions to Target Mergers and Acquisition Rumors as Evidence from China"

is the title of this dissertation paper. The research question is: How do Chinese market

participants react to rumours of target companies being involved in mergers and acquisitions, and

what factors influence these reactions?

The study intends to investigate market reactions to rumours of target companies

involved in M&A deals in China by analyzing stock prices and trading volumes before and after

the rumours are announced. The study will also look into the factors that influence market

reactions, such as the type of M&A transaction, the target company's industry, and the credibility

of the rumour source.

This study is significant because it will provide an in-depth understanding of market

reactions to M&A rumours in China, a rapidly growing economy with a relatively unstudied

capital market. The study's findings will be helpful to M&A practitioners such as investors,

corporate executives, and policymakers.

1.1.2 Background and Significance of the Research Study

Market responses to mergers and acquisitions (M&A) are a well-established topic of

study in finance and economics. However, most available scholarship on this issue has

concentrated on developed markets such as the United States and Europe. On the other hand,

capital markets in rising economies such as China have gotten very little attention in this respect.

January, 2023 7
 As China's economy grows and its capital markets become more intertwined with the

global economy, it is critical to understand how Chinese market players respond to M&A

rumours. This is especially important considering the growing number of cross-border M&A

transactions involving Chinese corporations.

This study is significant in two ways. For starters, it will give an in-depth knowledge of

market responses to M&A rumours in China, a fast-rising nation with a largely unstudied capital

market. This information is helpful for M&A investors, business executives, and legislators.

Second, the research will add to the current literature on market responses to M&A rumours by

offering data from a developing market.

In summary, the study of market reactions to M&A rumours in China is essential as it

will provide insights into the functioning of the capital markets in this rapidly growing economy

and contribute to the existing literature on this topic by providing evidence from an emerging

market.

In addition, note that Rumblings are bits of common knowledge that are unsupported by

evidence and thus cannot be investigated objectively. As a result, rumblings cannot be proven to

be true or false. Rumours are most commonly spread through various forms of interpersonal

contact, mainly through spoken word. Because they both mean the same thing, rumblings and

rumours are frequently used interchangeably to refer to the same thing. Takeover rumours may

significantly impact the companies' stock prices that are the rumoured subject. This is because

accurate forecasts are the most reliable indicator of whether or not a rumour is true.

The Chinese capital market segment known as "mergers and acquisitions" or "2015" has

generated much speculation, giving rise to several urban legends. There is no logic to the impact

January, 2023 8
of merger and acquisition rumours on state-owned enterprises (SOEs) and other businesses. This

study aims to assess the effects of merger and acquisition rumours on state-owned enterprises

(SOEs) and private companies not controlled by the government. Since the rumour was first

spread, there has been no new information regarding a merger and acquisition transaction

involving the rumoured target. For the past two years, this has been the case. According to the

information gathered, the Chinese market behaved similarly to before the rumours spread.

Even though no market share is a significant response to M&A speculations concerning

non-SOE targets, there was a significant run-up in price before the rumour. Even though pre-

rumour price runs are typically only significant for SOE targets, this is still the case. Examining

cumulative abnormal returns (CARs) reveals that genuine rumours produce significantly higher

CARs than manufactured rumours. This is because people are more likely to believe genuine

rumours. Investors can tell the difference between true and false rumours, as evidenced by an

examination of price fluctuations in the market before the rumour spread, demonstrating that

investors are paying attention to the market.

Businesses with a higher level of institutional ownership are more likely to have

erroneous links drawn between them, as well as rumours of mergers and acquisitions, than

businesses with a lower level of institutional ownership. This is because institutional ownership

is more concentrated in corporations with larger market capitalizations. On the other hand, there

is a lower likelihood that the market will overreact to objectives stated to have large institutions'

strategic support.

1.1.3 Review of Literature and Hypothesis of the Research Study

The "Market Reactions to Target Mergers and Acquisition Rumors as Evidence from

China" literature study would include examining current research on the issue of market

January, 2023 9
reactions to M&A rumours, with a particular emphasis on studies undertaken in the Chinese

market. The literature review would include theoretical and empirical investigations and an

assessment of the present level of knowledge on this issue.

The efficient market hypothesis (EMH) and the behavioural finance approach are likely

the focus of theoretical research on market responses to M & A rumours. According to the EMH,

stock prices reflect all publicly accessible information, and it is challenging to continuously

obtain abnormal returns by using insider knowledge or other private information. Many studies,

however, have demonstrated that stock prices respond to M&A rumours, implying that the EMH

may not hold in the case of M&A speculations.

On the other hand, behavioural finance contends that psychological variables such as

investor emotion and overconfidence impact stock prices. According to this viewpoint, the

market response to M&A rumours is influenced by investors' perceptions and prejudices rather

than fundamental considerations.

Empirical research on the issue would likely study target businesses' stock price and

trading volume responses to M & rumours. To measure the market response to M & A rumours,

these studies likely use several approaches, such as event study analysis.

In the case of China, there is a growing corpus of research analyzing market responses to

merger and acquisition rumours. Notable research has shown that market responses to M&A

rumours in China are comparable to those observed in developed markets such as the United

States and Europe, while others have discovered some variances. Some research, for example:

January, 2023 10
1.1.3.1 Cost increases before a public announcement

The research found evidence of pre-bid price run-ups for target firms before the public

announcement of M&A agreements. This occurred before the M&A agreements were made

public. Those with inside knowledge have a better chance of profiting from unusually high

returns. Still, they might lose out on those profits if sensitive information is leaked to outsiders

before successfully disseminating it to the broader public. The market anticipation theory and the

insider knowledge leakage hypothesis have been the subjects of investigation by researchers

using various methodologies.

1.1.3.2 Profiting from speculation regarding potential mergers and acquisitions is an

excellent way to make money.

Before the announcement of M&A agreements, researchers found evidence of pre-bid

price run-ups for the companies that were going to be the targets of the bids. According to

Andrade et al., the value of target companies increased by 23.8% during the window event that

started 20 days before the acquisition was disclosed. A leak of confidential information could

allow insiders to benefit from returns that are unusually high before the news is officially

released to the general public. Investors tend to overreact to rumours about businesses that

involve a high degree of speculation. Betton et al. (2018) state that it is reasonable to anticipate

the announcement of a takeover and that accurate rumours perform better than incorrect rumours.

It is possible that some investors created abnormal profits by taking advantage of a breach of

security that occurred early on in the process.

January, 2023 11
1.1.3.3 The long and winding history of mergers and acquisitions in China, which has been

convoluted and drawn out

There has been a significant rise in the number of mergers and acquisitions in China over

the past few years. This is because the Chinese market is considered one of the most

undeveloped worldwide. The presence of state-owned enterprises (SOEs) in the acquisition

process is most likely the cause of the positive abnormal returns reported by Chinese acquirers.

Most Chinese institutional investors are not financial institutions but other businesses

intimately associated with the focus enterprises, either as business partners, suppliers,

purchasers, or alliance partners joined by shared shareholdings and ordinary board members.

This argues that the explanation for the limited monitoring function of China's institutional

investors is that they are other businesses rather than financial institutions. Rumoured SOE

targets will have higher market responses than other targets.

January, 2023 12
CHAPTER TWO

2.1 Research Methodology

The research approach for "Market Reactions to Target Mergers and Acquisition Rumors

as Evidence from China" would comprise the investigation of market reactions to M&A rumours

in China using various data sources and analytical methodologies. The following are some

potential research methods:

Event study analysis: This strategy examines the target businesses' stock price and trade

volume around the period of the M&A rumours. The stock price and trade volume information

would come from a reliable financial database like Bloomberg or Wind. The event window is

between the rumour's publication date and the formal announcement or denial of the rumour. The

event window's abnormal returns (ARs) and cumulative abnormal returns (CARs) will be

computed.

This strategy entails examining the content of news items and press releases connected to

M&A speculations. The content analysis would aid in identifying the main facts and attitudes

communicated in news stories and press releases. This strategy would reveal the origins of the

rumours and the motives of the market players engaged.

Survey research is surveying market players, such as investors and analysts, to acquire

information on their thoughts and actions about M&A rumours. The poll would contain

questions about the rumours' origins, perceived integrity, and investment choices in reaction to

the reports.

Regression analysis: This approach examines the link between numerous parameters and

market responses to M&A rumours using regression analysis. The parameters addressed in the

January, 2023 13
regression analysis include the integrity of the rumours, the target firm's ownership structure, and

industry characteristics. The research would most likely be a cross-sectional study that spans a

period during which rumours of M&

2.2 Data sources for the Research Study

The following data sources might help research "Market Reactions to Target Mergers and

Acquisition Rumors as Evidence from China":

Financial data: The target businesses' historical stock price and trade volume data would

be obtained from a reliable financial database like Bloomberg or Wind. This information would

be used to determine the target businesses' abnormal returns and cumulative abnormal returns

around the period of the M&A rumours.

News articles: M&A-related news would be gathered from several sources, including

financial news websites and newspapers. The news items would be utilized to determine the

origins of the rumours, the main information given in the rumours, and the market players'

views.

Press releases: Press releases from the target companies and the suspected acquirers

would be compiled to give formal confirmation of the rumours.

Surveys: Market players, such as investors and analysts, would be polled to acquire

information on their opinions and behaviours about M&A rumours.

Financial statements: The financial statements of the target businesses would be

gathered to learn about their financial performance and who owns them.

January, 2023 14
 Other data: Additional data such as industry information and macroeconomic indicators

would be gathered and utilized as control variables in the study.

2.3 Research Study Design

The research approach for "Market Reactions to Target Mergers and Acquisition Rumors

as Evidence from China" would likely be a cross-sectional study covering a period when market

rumours about M&A deals involving Chinese firms circulated. The following actions will be

taken as part of the research:

The population of interest for the research would be Chinese enterprises that were the

subject of M&A rumours during the study period. Depending on market capitalization and

industrial sector parameters, companies would be chosen from a credible financial database, such

as Bloomberg or Wind.

Data gathering: Data will be gathered from various sources, including financial

databases, news stories, press releases, surveys, and financial statements. The data would span

from the date of the rumour through the date of the formal declaration or rejection of the rumour.

Data analysis: The data would be studied using a variety of techniques, including event

study analysis, content analysis, survey research, and regression analysis.

Event study analysis: The target businesses' stock price and trade volume will be

examined around the period of the M&A rumours. The target companies' abnormal and

cumulative abnormal returns for the event window would be computed.

Content analysis: The content of news stories and press releases connected to M&A

rumours will be examined to determine the origins of the rumours as well as the motives of the

market players involved.

January, 2023 15
 Surveys would be performed among market players, such as investors and analysts, to

acquire information on their thoughts and behaviours around M&A rumours.

Regression analysis would investigate the link between different parameters and market

responses to M&A rumours. The parameters addressed in the regression analysis include the

integrity of the rumours, the target firm's ownership structure, and industry characteristics.

Findings interpretation: The data analysis results will be evaluated in light of the

current literature on the issue and the research objectives.

2.4 Statistical Analysis

The following methodologies would most likely be used in the statistical Analysis for

"Market Reactions to Target Mergers and Acquisition Rumors as Evidence from China":

Event study analysis: This approach would be used to examine the target businesses' stock price

and trading volume around the time of the M&A rumours. The target companies' abnormal and

cumulative abnormal returns for the event window would be computed. This would enable the

abnormal returns to be calculated across the event window.

T-test: This approach compares the abnormal returns of the target businesses between

authentic and created rumours to see whether there is a significant difference between the two

groups.

Regression analysis: This approach would investigate the link between numerous

parameters and market responses to merger and acquisition rumours. The parameters addressed

in the regression analysis include the integrity of the rumours, the target firm's ownership

structure, and industry characteristics. This strategy would investigate the link between

institutional ownership and the chance of a business becoming the subject of M&A rumours.

January, 2023 16
 Sentiment analysis: This approach would examine market players' attitudes in news

stories and press releases on M&A rumours.

The chi-square test would determine the percentage of natural and erroneous rumours

that market participants believe.

2.5 Sample selection

The China Stock Market and Accounting Research Database were used to acquire

economic and stock market data. The database was utilized to identify all the alleged merger and

acquisition targets posted between January 1, 2004, and December 31, 2014. There have been

rumblings, and these stories are spreading, that the bare minimum for completing a contract is

one million Chinese Yuan. We looked up the date record for the rumour in the Zephyr database,

which Bureau Van Dijk handles. This date, which can be discovered in the database, is the first

time the allegedly fraudulent transaction was discussed.

When the investigation was completed, there were 848 rumours regarding mergers and

acquisitions involving 665 distinct listed target firms. Two hundred thirty-five of these were

nothing more than rumours that proved to be false, while 613 were shown to be true.

Study Variables Variable Description:

High-tech point of If the target organization is involved in a high-technology business, the value of

aim a dummy variable is 1, but if it is not, the value is 0.

True rumour A fake variable that is incremented to one when there is an official

announcement of a merger or acquisition after the rumour and reset to zero

January, 2023 17
 otherwise (Bureau van Dijk)

SOE If the target company is a state-owned entity, then the dummy variable will be

set to one; in all other cases, it will be set to zero (CSMAR).

Institutional the cumulative proportion of the target company's shares that all institutional

ownership investors owned as of the end of the preceding fiscal year and the date when

M&A rumours began to circulate in target businesses (CSMAR)

Pressure-sensitive Before talk of mergers and acquisitions (M&A) began to circulate (CSMAR),

institutional all of the shares of target firms owned by pressure-sensitive institutional

ownership investors before had already been purchased by that point in the year had

already been purchased.

Pressure-insensitive As of December 31, institutional investors who don't care about pressure owned

institutional shares in target companies. This was before the day when the M&A rumour

ownership was first made public (CSMAR).

Management cumulative percentage shareholdings owned by businesses' management as of

ownership the end of the preceding fiscal year previous to the date of the M&A rumour in

target firms (CSMAR)

Ownership The aggregate number of shares held by the top 10 shareholders as of the close

concentration of business one year before the date when M&A rumours began to circulate

(CSMAR).

January, 2023 18
Firm size The natural logarithm of the total assets of the target company at the end of the

fiscal year, right before M&A rumours started to spread (CSMAR).

ROA return on assets of the target company as of the end of the year before the date

of the M&A rumour (CSMAR).

Leverage the ratio of the target company's total debt to its total assets as of the end of the

year before the date of a potential merger or acquisition (CSMAR).

FCF/share free cash flow per share of the target company as of the end of the fiscal year

before the date of the M&A rumour (CSMAR).

Tobin’s q the market value of shares plus total debt divided by the book value of the target

company's assets at the end of the year before the M&A rumour date

(CSMAR).

Table 1: Explanation of the Different Variables

When estimating CARs for a short period concentrating on a date associated with a

prospective merger or acquisition, we apply the traditional approach of event research. As a

result, we are in a position to acquire the most exact findings imaginably. "Event date 0" is

related to "event date 1," which is the day the investigation was carried out. A typical OLS

market model is coupled with daily dividend-adjusted return data on individual business shares.

This enables the investigation of stock prices that are either excessively high or unexpectedly

low.

January, 2023 19
 As the M&A rumour spread, beta coefficients were generated using an estimated range

ranging from -270 to -21. This was accomplished well before the day when the story started to

go across the community.

2.6 Sample description

We use the traditional approach of event research to determine CARs for a short period,

concentrating on a date anticipated to be associated with a possible merger or acquisition. The

words "event date" and "rumour date" are synonymous and may be used interchangeably. As a

result, we can get the most exact results imaginable. Takeover rumours have the potential to

significantly impact the stock prices of the companies at the centre of the rumour. Rumours

spread most often via word-of-mouth and other forms of interpersonal interaction.

This research examines the impact of M&A rumours on SOEs and private enterprises that

the government does not control. Even if there isn't a significant reaction to M&A rumours

involving non-SOE targets, there is a price increase before the rumour. Larger organizations

sometimes have a greater capacity for acquiring goods and services than smaller enterprises. This

reduction in value might be attributed to the Administrative Measures on Information Disclosure

by Listed Companies.

January, 2023 20
CHAPTER THREE

3.1 Results and Analysis of the Research Study

The following are expected to be included in the findings and Analysis of "Market

Reactions to Target Mergers and Acquisition Rumors as Evidence from China":

The outcomes of the event study analysis would indicate the target businesses' abnormal

returns and cumulative abnormal returns around the period of the M&A rumours. This would

demonstrate the market's response to the rumors and whether the rumours significantly

influenced the target businesses' stock prices.

T-test: The t-test findings indicate whether or not there is a significant difference in the

abnormal returns of the target companies between natural and created rumors. This will show if

true rumors influence stock prices more than contrived rumors.

Regression analysis: The regression analysis findings illustrate the association between

numerous parameters and market responses to M&A rumours. This would demonstrate which

variables have the most significant influence on the market's response to M&A speculations.

Logistic regression findings indicate the association between institutional ownership and

a company's chance to become the subject of M & speculations. This will show if enterprises

with greater institutional ownership are more likely to be the target of M&A speculations.

Sentiment analysis: The sentiment analysis findings would indicate market participants'

sentiments in news stories and press releases connected to M&A speculations. This would

demonstrate how market participants interpret the rumors and whether they are perceived

favourably or adversely.

January, 2023 21
 The chi-square test findings would illustrate the difference in the percentage of genuine

and fraudulent rumours market participants believe. This would demonstrate how well market

participants can discern between genuine and misleading rumors.

Overall, the study's findings would give insights into market reactions to M&A rumours

in China and the elements that influence these reactions. It would also give evidence of the

influence of rumors on target company stock prices and the accuracy of market participants in

differentiating authentic rumors from fake ones.

3.2 Empirical Evidence of market reactions to target M&A rumours in china

The following would most likely be empirical proof of "Market Reactions to Target

Mergers and Acquisition Rumors as Evidence from China":

● Event study analysis: The event study analysis would give proof of the target businesses'

abnormal returns and cumulative abnormal returns during the period of the M&A rumors.

This would show how the market reacted to the rumors and whether or not the rumors

had a significant influence on the target businesses' stock prices.

● T-test: The t-test would show if there is a significant difference in the abnormal returns of

the target companies between natural and created rumours. This will show if true rumors

influence stock prices more than fabricated rumors.

● Regression research would give proof of the association between numerous parameters

and market responses to M&A speculations. This would show which variables have the

most influence on the market's response to M&A speculations.

January, 2023 22
 ● Logistic regression would give proof of the association between institutional ownership

and the chance of a business being the focus of M&A speculations. This will show if

enterprises with greater institutional ownership are more likely to be the subject of M&A

speculations.

● Sentiment analysis: Sentiment analysis would give proof of market players' sentiments in

news stories and press releases relating to M&A speculations. This would show how

market participants interpret the rumors and whether they are perceived favourably or

adversely.

● The chi-square test would demonstrate the difference in the percentage of genuine and

fraudulent rumors that market participants believe. This would show how well market

participants discern between genuine and misleading rumours.

Data from trustworthy sources such as financial databases, stock exchange markets,

financial news stories, and press releases would be used to obtain empirical proof. The acquired

data will be evaluated statistically utilizing methods such as event study, t-test, regression

analysis, logistic regression, sentiment analysis, and chi-square test. The study's findings give

insights into market reactions to M & A rumours in China and the elements that influence these

reactions, which can be utilized to make more accurate forecasts of future market trends.

January, 2023 23
3.3 Analysis of factors influencing market reactions

The following are likely to be included in the examination of market responses in

"Market Reactions to Target Mergers and Acquisition Rumors as Evidence from China":

The target firm's kind, such as a state-owned enterprise (SOE) or a private company, may

impact market responses to M&A speculations. Because of their more significant market

capitalization and government engagement, SOEs, for example, may have a more substantial

influence on the market.

The rumour's veracity: The rumour's integrity may also impact market responses.

Genuine rumours influence stock prices more than created rumors because investors regard

genuine rumors as more likely to be true.

The degree of institutional ownership may also have an impact on market responses.

Firms with a higher degree of institutional ownership may be more likely to be the subject of

M&A rumours, and such speculations may significantly impact their stock prices.

● Market players' mood: Market participants' sentiments, as expressed in news stories

and press releases, may also impact market responses. Positive sentiment may have a

higher influence on stock prices, whilst negative sentiment may have a lower influence.

● Rumour timing: The timing of the rumour may also influence market responses.

Rumours that circulate close to the announcement of a merger or acquisition may have a

more significant impact on stock prices than rumours that circulate further away from the

announcement.

January, 2023 24
 ● Target industry: The target industry may also impact market responses. Rumours

regarding mergers and acquisitions in specific sectors may be seen more favourably by

the market and substantially influence stock prices.

The Analysis would be done by doing regression analysis, chi-square test, or chi-square

test of independence and logistic regression. These statistical techniques enable the evaluation of

the relationship between various factors and market reactions to M & A rumours. The results of

the Analysis would provide insights into the factors that influence market reactions to M&A

rumours in China and could be used to provide more accurate predictions of future market

trends.

January, 2023 25
CHAPTER FOUR

4.1 Analysis and Discussion

Also, every company open to the public must publish an official explanation in media

outlets permitted by the China Securities Regulatory Commission. This is to show that they are

following these rules. This is a requirement that must be met in order for the company to be

considered compliant (CSRC).

Exemplification of the yearly distribution:

Year False rumour True rumour Total

2004 26 32 58

2005 14 28 42

2006 45 76 121

2007 21 26 47

2008 15 24 39

2009 10 32 42

2010 13 40 53

January, 2023 26
 2011 13 59 72

2012 14 68 82

2013 27 87 114

2014 37 141 178

Total 235 613 848

Sample industrial distribution：

Industry category False rumour True rumour Total

Agriculture 2 11 13

Mining 6 17 23

Construction 6 18 24

Manufacturing 173 435 608

Transportation 11 33 44

Communication 3 1 4

Public Utilities 8 24 32

January, 2023 27
 Wholesale trading 4 8 12

Retail trading 10 21 31

Services 12 45 57

Total 235 613 848

Table 2: Sample yearly distribution and industrial distribution

Manufacturing companies, according to reports, have been the subject of most takeover

rumours. This is because many central SOEs dominate China's communications industry. This

problem directly results from the fierce competition in the market for dominant services within

the Chinese economy. The odds of each outcome were computed on the assumption that the

rumour would be proven accurate in the end. The median period is just 14 days long, which is

much less than the average length of time for some time. 56.61 per cent of formal

announcements of mergers and acquisitions occur within twenty working days of the rumour

being discovered for the first time.

The number of trading days between The total amount of Percentage Calculating the

the date of the rumour and the announcement observations Cumulative

date Percentage

1&2 trading days 43 7.01 7.01

3–10 trading days 213 34.75 41.76

January, 2023 28
 11–20 trading days 91 14.86 56.61

21–50 trading days 93 15.18 71.78

51–100 trading days 39 6.31 78.14

101–200 trading days 67 10.88 89.23

Over 200 trading days 66 10.63 100.00

Total observations 613

Average length 63.95 trading

days

Median length 14 trading days

Minimum length One trading day

Maximum length 771 trading days

Table 3: The number of trading days between when the rumour started and when the

merger or acquisition was officially announced.

SOEs, being more potent than other organizations, are more prone to participate in

spreading false information. There is a discrepancy of 20 percentage points between the

proportion of institutional ownership in firms that are not SOEs, which is 7.473%. This puts
January, 2023 29
China at a disadvantage compared to the United States, where institutions own more than half of

all shares. Individual investors dominate China's stock market.

SOE Non- Comparison of the Comparison of the two

SOE two sets of means medians as a test

Variables N Mean Median N Mean Median

High-tech target 367 0.142 0.000 286 0.073 0.000 (0.001)*** (0.001)***

Institutional ownership 367 8.975 5.120 286 7.473 5.460 (0.064)* (0.906)

Pressure-sensitive 367 0.587 0.000 286 0.438 0.000 (0.332) (0.180)

institutional ownership

Pressure-insensitive 367 8.388 4.704 286 7.035 5.080 (0.091)* (0.618)

institutional ownership

Management ownership 418 0.004 0.000 361 0.142 0.001 (0.000)*** (0.000)***

Ownership concentration 381 57.124 58.734 489 57.370 58.105 (0.822) (0.849)

Firm size 439 21.972 21.790 381 21.179 21.022 (0.000)*** (0.000)***

Leverage 439 0.570 0.581 381 0.883 0.477 (0.097)* (0.000)***

ROA 439 0.027 0.030 381 −0.079 0.030 (0.048)** (0.896)

FCF/share 439 −0.204 −0.045 381 −0.441 −0.196 (0.009)*** (0.000)***

Tobin’s q 434 1.426 1.015 370 2.476 1.590 (0.000)*** (0.000)***

Table 4: Comparative study of rumoured targets held by SOE and those held by non-SOE

The results that may be achieved by classifying the companies that were the subject of

the inquiry according to whether or not the rumour in question was true are shown in Table 5.

January, 2023 30
These results provide an interpretation of the features of the sample, which are summarized in

the table that can be found further down on this page. The table may be accessed by clicking

here. Even though pressure-insensitive institutional ownership is the single most critical

characteristic that divides the two groups, the false rumour group had much greater levels of

institutional ownership than the honest rumour group (10.314%) compared to 7.262%). Rumours

involving large corporations are more likely to receive media attention than those involving

smaller companies. This is because the average size of companies that were the targets of false

rumours is significantly larger than the average size of the firms that were the targets of accurate

rumours. This is because the size of the corporations that were the targets of true rumours, on

average, is much less than that of the companies that were the focus of false rumours. This is the

reason why this is the case.

False rumour targets True rumour targets Comparison of the Comparison of the two

two sets of means medians as a test

Variables N Mean Median N Mean Median

High-tech target 23 0.106 0.000 613 0.103 0.000 (0.878) (0.878)

Institutional ownership 16 10.314 6.482 485 7.626 4.980 (0.003)*** (0.010)**

Pressure-sensitive 16 0.550 0.000 485 0.528 0.000 (0.899) (0.340)

institutional ownership 8

Pressure-insensitive 16 9.809 6.167 485 7.098 4.440 (0.003)*** (0.006)***

institutional ownership 8

Management ownership 21 0.073 0.000 569 0.066 0.000 (0.602) (0.697)

January, 2023 31
 Ownership concentration 21 57.625 58.625 603 57.123 58.625 (0.684) (0.703

Firm size 21 21.430 21.321 603 21.670 21.574 (0.016)** (0.004)***

Leverage 21 0.823 0.513 603 0.677 0.550 (0.493) (0.013)**

ROA 21 0.004 0.034 603 −0.032 0.029 (0.557) (0.206)

FCF/share 21 −0.330 −0.064 603 −0.309 −0.111 (0.838) (0.245)

Tobin’s q 21 1.773 1.207 594 1.958 1.231 (0.422) (0.728)

Table 5: Contrasting the actual rumour targets with the fake rumour targets using a

univariate analysis

Observations and judgments derived from actual clinical experience. The likelihood that

rumours about mergers and acquisitions are accurate may be affected by various circumstances.

These considerations may include the following:

The probity regressions used to make predictions about the likelihood that rumours of

mergers and acquisitions are based on actuality are shown in table 6. According to the results,

there is a strong link between institutional ownership and the likelihood that a merger or

acquisition rumour is true. This was shown to be the case in both the public and private sectors.

This fact was found by looking at the relationship between the two variables. On the other hand,

the impact of institutional ownership is only significant for SOE targets, demonstrating that

January, 2023 32
SOEs with higher degrees of institutional ownership are more likely to get involved in erroneous

rumours.

Also, both the size of the firm and Tobin's q are significantly positive for non-SOEs. This

means rumors of a takeover are more likely to lead to a formal bid for large non-SOE firms and

non-SOE targets with high growth potential. On-SOE firms and non-SOE targets with high

growth potential are more desirable acquisitions. This is due to the fact that major non-SOE

enterprises as well as non-SOE prospects that have a strong potential for growth are more

appealing acquisitions. Since this always occurs, whether or not the non-SOE in question is also

an SOE is irrelevant.

SOE targets Non-SOE targets Total targets

(1) (2) (3) (4) (5) (6)

High-tech target 0.082 0.074 −0.451 −0.447 −0.290 −0.290

(0.313) (0.282) (−1.545) (−1.533) (−1.594) (−1.600)

Pressure-sensitive 0.001 −0.033 −0.013

institutional ownership

(0.028) (−0.731) (−0.475)

Pressure-insensitive −0.014** −0.011 −0.012**

institutional ownership

(−2.214) (−0.976) (−2.193)

Institutional −0.014** −0.013 −0.012**

ownership

January, 2023 33
 (−2.214) (−1.094) (−2.278)

SOE 0.079

(0.641)

Firms size 0.042 0.047 0.250** 0.252** 0.147*** 0.138**

(0.546) (0.611) (2.104) (2.122) (2.589) (2.376)

Leverage 0.659 0.646 −0.002 −0.003 −0.028 −0.028

(1.266) (1.245) (−0.122) (−0.161) (−1.618) (−1.632)

ROA −2.358 −2.403 −1.127 −1.158 −1.603 −1.599*

(−1.458) (−1.496) (−0.895) (−0.915) (−1.634) (−1.646)

FCF/share 0.197*** 0.196*** −0.020 −0.020 0.058 0.056

(3.286) (3.247) (−0.223) (−0.229) (1.296) (1.246)

Tobin’s q −0.096 −0.094 0.111*** 0.112*** 0.045* 0.045*

(−1.308) (−1.284) (2.676) (2.646) (1.649) (1.686)

Year & Industry √ √ √ √ √ √

controls

Cons. 0.668 0.563 −6.097** −6.145** −2.488* −2.340*

(0.378) (0.320) (−2.286) (−2.299) (−1.816) (−1.703)

January, 2023 34
 N 360 360 268 268 643 643

Pseudo. R2 (%) 13.91 13.88 14.75 14.68 8.40 8.45

Correctly classified 76.39 76.39 77.99 77.24 75.74 74.96

(%)

SOE targets Non-SOE targets Total targets

(1) (2) (3) (4) (5) (6)

High-tech target 0.082 0.074 −0.451 −0.447 −0.290 −0.290

(0.313) (0.282) (−1.545) (−1.533) (−1.594) (−1.600)

Pressure-sensitive 0.001 −0.033 −0.013

institutional ownership

(0.028) (−0.731) (−0.475)

Pressure-insensitive −0.014** −0.011 −0.012**

institutional ownership

(−2.214) (−0.976) (−2.193)

Institutional −0.014** −0.013 −0.012**

ownership

(−2.214) (−1.094) (−2.278)

SOE 0.079

January, 2023 35
 (0.641)

Firms size 0.042 0.047 0.250** 0.252** 0.147*** 0.138**

(0.546) (0.611) (2.104) (2.122) (2.589) (2.376)

Leverage 0.659 0.646 −0.002 −0.003 −0.028 −0.028

(1.266) (1.245) (−0.122) (−0.161) (−1.618) (−1.632)

ROA −2.358 −2.403 −1.127 −1.158 −1.603 −1.599*

(−1.458) (−1.496) (−0.895) (−0.915) (−1.634) (−1.646)

FCF/share 0.197*** 0.196*** −0.020 −0.020 0.058 0.056

(3.286) (3.247) (−0.223) (−0.229) (1.296) (1.246)

Tobin’s q −0.096 −0.094 0.111*** 0.112*** 0.045* 0.045*

(−1.308) (−1.284) (2.676) (2.646) (1.649) (1.686)

Year & Industry √ √ √ √ √ √

controls

Cons. 0.668 0.563 −6.097** −6.145** −2.488* −2.340*

(0.378) (0.320) (−2.286) (−2.299) (−1.816) (−1.703)

N 360 360 268 268 643 643

Pseudo. R2 (%) 13.91 13.88 14.75 14.68 8.40 8.45

Correctly classified 76.39 76.39 77.99 77.24 75.74 74.96

January, 2023 36
 (%)

SOE targets Non-SOE Total targets

targets

(1) (2) (3) (4) (5) (6)

High-tech target 0.082 0.074 −0.451 −0.447 −0.290 −0.290

(0.313) (0.282) (−1.545) (−1.533) (−1.594) (−1.600)

Pressure-sensitive institutional ownership 0.001 −0.033 −0.013

(0.028) (−0.731) (−0.475)

Pressure-insensitive institutional ownership −0.014** −0.011 −0.012**

(−2.214) (−0.976) (−2.193)

Institutional ownership −0.014** −0.013 −0.012**

(−2.214) (−1.094) (−2.278)

SOE 0.079

(0.641)

Firms size 0.042 0.047 0.250** 0.252** 0.147*** 0.138**

January, 2023 37
 (0.546) (0.611) (2.104) (2.122) (2.589) (2.376)

Leverage 0.659 0.646 −0.002 −0.003 −0.028 −0.028

(1.266) (1.245) (−0.122) (−0.161) (−1.618) (−1.632)

ROA −2.358 −2.403 −1.127 −1.158 −1.603 −1.599*

(−1.458) (−1.496) (−0.895) (−0.915) (−1.634) (−1.646)

FCF/share 0.197*** 0.196*** −0.020 −0.020 0.058 0.056

(3.286) (3.247) (−0.223) (−0.229) (1.296) (1.246)

Tobin’s q −0.096 −0.094 0.111*** 0.112*** 0.045* 0.045*

(−1.308) (−1.284) (2.676) (2.646) (1.649) (1.686)

Year & Industry controls √ √ √ √ √ √

Cons. 0.668 0.563 −6.097** −6.145** −2.488* −2.340*

(0.378) (0.320) (−2.286) (−2.299) (−1.816) (−1.703)

N 360 360 268 268 643 643

Pseudo. R2 (%) 13.91 13.88 14.75 14.68 8.40 8.45

Correctly classified (%) 76.39 76.39 77.99 77.24 75.74 74.96

SOE targets Non-SOE Total targets

targets

January, 2023 38
 (1) (2) (3) (4) (5) (6)

High-tech target 0.082 0.074 −0.451 −0.447 −0.290 −0.290

(0.313) (0.282) (−1.545) (−1.533) (−1.594) (−1.600)

Pressure-sensitive institutional ownership 0.001 −0.033 −0.013

(0.028) (−0.731) (−0.475)

Pressure-insensitive institutional ownership −0.014** −0.011 −0.012**

(−2.214) (−0.976) (−2.193)

Institutional ownership −0.014** −0.013 −0.012**

(−2.214) (−1.094) (−2.278)

SOE 0.079

(0.641)

Firms size 0.042 0.047 0.250** 0.252** 0.147*** 0.138**

(0.546) (0.611) (2.104) (2.122) (2.589) (2.376)

Leverage 0.659 0.646 −0.002 −0.003 −0.028 −0.028

January, 2023 39
 (1.266) (1.245) (−0.122) (−0.161) (−1.618) (−1.632)

ROA −2.358 −2.403 −1.127 −1.158 −1.603 −1.599*

(−1.458) (−1.496) (−0.895) (−0.915) (−1.634) (−1.646)

FCF/share 0.197*** 0.196*** −0.020 −0.020 0.058 0.056

(3.286) (3.247) (−0.223) −0.229) (1.296) (1.246)

Tobin’s q −0.096 −0.094 0.111*** 0.112*** 0.045* 0.045*

(−1.308) (−1.284) (2.676) (2.646) (1.649) (1.686)

Year & Industry controls √ √ √ √ √ √

Cons. 0.668 0.563 −6.097** −6.145** −2.488* −2.340*

(0.378) (0.320) (−2.286) (−2.299) (−1.816) (−1.703)

N 360 360 268 268 643 643

Pseudo. R2 (%) 13.91 13.88 14.75 14.68 8.40 8.45

Correctly classified (%) 76.39 76.39 77.99 77.24 75.74 74.96

Table 6: Probability regressions are used to determine whether merger and acquisition

rumours are likely true.

The table below shows the results of probity regressions conducted to forecast the

likelihood of genuine M&A rumours for China-listed target firms. This study covers the years

beginning on January 1, 2004, and continuing through December 31, 2014. The use of cluster-

adjusted robust standard errors obtained the data.

January, 2023 40
 Figure 1 illustrates the daily abnormal returns for Chinese-listed target firms around the

M&A Rumor date. According to these data, investors pay more attention to SOEs than non-

SOEs. This contrasts the first hypothesis, which states that the market reacts less strongly to

firms reported as actual mergers and acquisitions targets.

Figure 1: Cumulative abnormal returns: accurate rumours of mergers and acquisitions vs

false rumours of mergers and acquisitions

Figure 1 illustrates the distinction between authentic and fabricated M&A rumours via

cumulative abnormal returns. An approach often used in event research was utilized in creating

this figure, which depicts the daily cumulative average abnormal returns for Chinese listed target

businesses around the date of the M&A Rumor. A one-factor OLS market model is utilized to

estimate the abnormal returns, and the SHSE and SZSE ALL share indexes are used as a stand-in

for the market portfolio in this model. The sample consists of 270 rumours about mergers and

acquisitions that began on January 1, 2004, and ended on December 31, 2014, with 121 being

January, 2023 41
 false and 149 being true.

Figure 2: compares the cumulative abnormal returns for rumoured SOE and non-
rumoured non-SOE targets.
An increase in price for the targets of an M&A rumour occurs over a period greater than

twenty days before the publishing date of the M&A rumour. The genuine rumour group

generated significant abnormal returns all the way through the event windows (-10, -1) and (-9, -

1) as well as from (-4, -1) to (-9, -1). (-2, -1). According to the information currently at their

disposal, investors should be able to distinguish between true rumours and those made up with a

reasonable degree of accuracy.

In addition, we concluded that only genuine rumours of SOE targets produced significant

pre-rumour anomalous returns for windows ranging from (20,1) to (2,1), with CARs ranging

from 1.339% to 3.787%. (Table 7).

All rumoured targets Non-SOE rumoured targets

SOE rumoured targets

Event False Actual rumours The False Actual The False Actual The

window rumours difference rumours rumours difference in rumours rumours difference in

January, 2023 42
 CAR CAR (%) across CAR CAR CAR (%) CARs (False CAR CAR CARs (False

(%) (False vs (%) vs True) (%) (%) vs True)

True)

(−20, −1) −1.921* 1.679 −3.600 −2.243* 3.729*** −5.972*** −1.543 −1.043 −0.499

(−1.779 −1.022 (−1.742) (−2.096 (3.865) (−4.128) (−1.373 (−0.442 (−0.180)

) ) ) )

(−19, −1) −1.913* 1.372 −3.285 −2.179* 3.787*** −5.966*** −1.625 −1.834 0.210

(−1.817 −0.836 (−1.599) (−2.086 (4.061) (−4.249) (−1.486 (−0.773 (0.076)

) ) ) )

(−18, −1) −1.894* 1.255 −3.149 −2.092* 3.479*** −5.571*** −1.718 −1.699 −0.018

(−1.871 0.79 (−1.586) (−2.103 (3.932) (−4.175) (−1.610 (−0.735 (−0.007)

) ) ) )

−17, −1) −1.572* 0.993 −2.565 −2.118* 3.066*** −5.184 *** −0.943 −1.762 0.819

(−1.645 −0.638 (−1.328) (−2.211 (3.517) (−3.981) (−0.964 (−0.778 (0.312)

) ) ) )

(−16, −1) −1.647* 0.909 −2.556 −2.136 2.959*** −5.094*** −1.029 −1.813 0.784

(−1.688 −0.591 (−1.331) (−2.133 (3.484) (−3.896) (−1.069 (−0.807 (0.302)

) ) ) )

(−15, −1) −1.681* 0.725 −2.406 −1.866* 2.420*** −4.286*** −1.404 −1.525 0.121

(−1.726 −0.486 (−1.284) (−1.841 (2.802) (−3.230) (−1.489 (−0.707 (0.048)

January, 2023 43
 ) ) ) )

(−14, −1) −1.657* 1.264 −2.921* −1.955* 2.639*** −4.594*** −1.259 −0.563 −0.696

(−1.751 −0.951 (−1.715) (−1.988 (3.127) (−3.553) (−1.370 (−0.302 (−0.316)

) ) ) )

(−13, −1) 1.509* 1.618 −3.127* −1.526 2.482*** −4.008*** −1.418 0.471 −1.889

(−1.661 −1.231 (−1.870) (−1.597 (2.967) −3.155) (−1.643 (0.254) (−0.872)

) ) )

(−12, −1) −1.02 1.711 −2.731 −0.955 2.906*** −3.861*** −1.001 0.125 −1.126

(−1.200 −1.283 (−1.638) (−1.062 (3.680) (−3.225) (−1.256 (0.065) (−0.508)

) ) )

(−11, −1) −0.753 1.804 −2.557 −0.628 3.084*** −3.712*** −0.779 0.103 −0.882

(−0.940 −1.361 (−1.560) (−0.732 (4.164) (−3.280) (−1.064 (0.053) (−0.398)

) ) )

(−10, −1) −0.900 2.171* −3.071* −0.427 3.502*** −3.930*** −1.408 0.403 −1.811

(−1.158 −1.673 −1.917) (−0.503 (4.653) (−3.455) (−2.075 (0.215) (−0.847)

) ) )

(−9, −1) −0.593 2.049* −2.642* −0.452 2.836*** −3.287*** −0.709 1.003 −1.712

(−0.801 −1.658 (−1.732) (−0.578 (3.802) (−3.008) (−1.012 (0.566) (−0.841)

) ) )

(−8, −1) −0.192 1.831 −2.023 −0.095 2.640*** −2.734** −0.252 0.758 −1.010

(−0.267 −1.585 (−1.408) (−0.131 (3.475) (−2.549) (−0.341 (0.471) (−0.538)

) ) )

January, 2023 44
(−7, −1) −0.038 1.706 −1.744 −0.114 2.594*** −2.708*** −0.024 0.527 −0.551

(−0.056 −1.641 (−1.334) (−0.181 (3.642) (−2.753) (−0.032 (0.371) (−0.324)

) ) )

(−6, −1) −0.328 1.558 −1.886 −0.439 2.608*** −3.047*** −0.283 0.164 −0.447

(−0.528 −1.615 (−1.561) (−0.792 (3.975) (−3.411) (−0.392 (0.125) (−0.283)

) ) )

(−5, −1) 0.033 1.296 −1.262 0.324 2.408*** −2.084*** −0.406 −0.181 −0.224

−0.056 −1.461 (−1.125) (0.633) (4.113) (−2.587) (−0.570 (−0.148 (−0.151)

) )

(−4, −1) 0.086 1.189* −1.103 0.264 1.875*** −1.611** −0.149 0.278 −0.427

−0.149 −1.741 (−1.200) (0.577) (3.780) (−2.321) (−0.205 (0.307) (−0.359)

(−3, −1) 0.16 1.258** −1.098 0.246 1.508*** −1.262** −0.024 0.925 −0.949

−0.32 −2.018 (−1.331) (0.633) (3.498) (−2.109) (−0.038 (1.087) (−0.867)

(−2, −1) −0.123 1.182** −1.306** −0.112 1.339*** −1.451*** −0.181 0.974 −1.155

(−0.306 −2.534 (−2.065) (−0.350 (3.833) (−2.976) (−0.356 (1.592) (−1.420)

) ) )

N 121 149 　 65 85 54 64

Table 7: A cumulative average of aberrant returns before the rumour spread.

We calculate CARs after hearing the rumour but before the announcement to investigate

how the market behaved after hearing a rumour. This allows us to study how the market reacted

January, 2023 45
after hearing the rumour. Because of this, we can disregard the noise created by the formal

mergers and acquisitions announcement events. Once we consider the impacts of the pre-

announcement, however, the big positive CARs no longer exist in the event windows of (+1,

+14), (+1, +15), (+1, +16) and (+1, +18). This is because genuine rumours produce considerable

positive CARs throughout these event periods. This would indicate that moves in the market

after rumors have been dispelled are contingent on formal announcements of mergers and

acquisitions. Figure 3 illustrates the discrepancies between the CARs for pre-announcement and

the actual rumour targets.

Furthermore, there is no significant difference in CARs between true and false rumour

targets. This demonstrates that the market is rational after published rumours when a formal

M&A announcement has been made (Table 8).

Figure 3. Cumulative abnormal returns: Pre-announcement actual rumour targets vs all

proper rumour targets. This figure uses a standard methodology for event studies to depict the

post-rumour daily average abnormal returns of Chinese-listed M&A targets. The abnormal

returns are computed using a one-factor OLS market model, and inside this model, the SHSE &

SZSE ALL share index serves as a stand-in for the market portfolio. The sample includes 149

actual rumour targets from January 1, 2004, to December 31, 2014.

January, 2023 46
 Figu

re 3: Cumulative anomalous returns: pre-announcement true rumour objectives vs all

actual rumour targets.

True rumours False rumours Differences between Differences between CARs:

CARs: Pre- Pre-announcement rumours

announcement vs. False rumours

Pre-announcement All true
rumours vs. All true
rumours rumours
rumours

Event window N CAR (%) N CAR N CAR

(%) (%)

CAR (+1, +2) 149 0.339 149 0.339 121 0.384 – −0.044

(0.814) (0.814) (0.788) – (−0.121)

CAR (+1, +3) 144 0.529 149 0.523 121 0.277 0.006 0.252

(1.057) (1.076) (0.462) (0.008) (−0.349)

CAR (+1, +4) 138 0.471 149 0.426 121 0.257 0.045 0.214

January, 2023 47
 (0.836) (0.793) (0.364) (0.057) (0.325)

CAR (+1, +5) 133 0.460 149 0.629 121 0.388 −0.169 0.072

(0.713) (1.044) (0.494) (−0.192) (0.166)

CAR (+1, +6) 132 0.082 149 0.394 121 −0.105 −0.313 0.187

(0.112) (0.585) (−0.127) (−0.315) (0.310)

CAR (+1, +7) 129 −0.210 149 0.363 121 −0.096 −0.573 −0.114

(−0.233 (0.443) (−0.119) (−0.471) (−0.040)

CAR (+1, +8) 127 −0.540 149 0.166 121 −0.516 −0.706 −0.024

(−0.586 (0.196) (−0.626) (−0.565) (0.125)

CAR (+1, +9) 125 −0.291 149 0.498 121 −0.842 −0.789 0.551

(−0.289 (0.537) (−0.943) (−0.576) (0.531)

CAR (+1, +10) 122 −0.188 149 0.671 121 −1.040 −0.859 0.852

(−0.185 (0.718) （−1.095） (−0.622) (0.755)

CAR (+1, +11) 121 −0.050 149 1.064 121 −1.044 −1.114 0.994

(−0.048 (1.095) （−1.056） (−0.780) (0.824)

CAR (+1, +12) 120 0.340 149 1.356 121 −1.014 −1.016 1.354

(0.321) (1.373) （−0.963） (−0.699) (1.040)

January, 2023 48
CAR (+1, +13) 118 0.120 149 1.511 121 −0.900 −1.391 1.020

(0.107) (1.455) (−0.798) (−0.907) (0.780)

CAR (+1, +14) 114 0.632 149 1.800* 121 −0.906 −1.167 1.538

(0.596) (1.688) (−0.740) (−0.762) (1.095)

CAR (+1, +15) 111 0.195 149 1.853* 121 −1.112 −1.658 1.307

(0.171) (1.634) (−0.912) (−1.010) (0.943)

CAR (+1, +16) 111 0.193 149 1.937* 121 −1.100 −1.744 1.293

(0.171) (1.693) (−0.891) (−1.060) (0.931)

CAR (+1, +17) 108 0.068 149 1.789 121 −0.938 −1.721 1.007

(0.057) (1.495) (−0.748) (−0.991) (0.744)

CAR (+1, +18) 107 0.172 149 2.070* 121 −0.921 −1.898 1.093

(0.140) (1.665) (−0.697) (−1.054) (0.754)

CAR (+1, +19) 106 −0.117 149 1.931 121 −1.405 −2.048 1.287

(−0.091 (1.508) (−1.087) (−1.097) (0.831)

CAR (+1, +20) 106 −0.372 149 1.735 121 −1.274 −2.107 0.901

(−0.285 (1.324) (−0.986) (−1.106) (0.607)

Table 8: The cumulative daily average of abnormal returns following a rumour

January, 2023 49
 The CARs of the rumoured targets as of the post-M&A rumour date are shown in the

following table. When calculating abnormal returns, the SHSE or SZSE index is used as the

market portfolio proxy. Standard OLS market-adjusted returns are then used to determine

abnormal returns. The sample consists of 270 rumours on mergers and acquisitions spread

between January 1, 2004, and December 31, 2014, with 121 rumours being false and 149 being

accurate reports. The parentheses show t-statistics. The degrees of significance denoted by the

symbols ***, **, and * are as follows: 0.01, 0.05, and 0.1, correspondingly.

Event Window All Rumors CARs False Rumors CARs Actual Rumors Differences between

(%) (%) CARs (%) CARs (False vs. True)

SOE (−20, −0.658 −1.816* 0.227 −2.043

Target −11) *

(−1.025) (−2.145 (0.246) (−1.585)

(−20, 1.414 −2.243 3.729*** −

−1) 5.972***

(1.094) (−1.477 (2.725) (−2.909)

(−10, 1.800** −0.427 3.502*** −3.929**

−1)

(2.214) (−0.354 (3.280) (−2.434)

(−1, +1) −0.068 −0.473 0.242 −0.715

(−0.147) (−0.590 (0.452) (−0.768)

January, 2023 50
 0 −0.400 −0.322 −0.460 0.138

(−1.576) (−0.754 (−1.490) (0.269)

(1, +10) 0.578 −1.077 1.843 −2.920*

(0.657) (−0.867 (1.515) (−1.654)

(+1,+20) 1.319 −1.425 3.418* −4.843*

(1.012) (−0.821 (1.840) (−1.855)

(+11, +20) 0.742 −0.348 1.575 −1.923

(0.910) (−0.308 (1.374) (−1.171)

(−20, 2.060 −3.990 6.687*** −10.677*

+20) **

(1.150) (−1.540 (2.841) (−3.034)

N 150 65 85

Non- (−20, −0.846 −0.135 −1.446 1.311

SOE Target −11)

(−0.955) (−0.107 (−1.167) (0.737)

(−20, −1.272 −1.543 −1.043 −0.499

−1)

January, 2023 51
 (−0.652) (−0.966 (−0.311) (−0.127)

(−10, −0.426 −1.408 0.403 −1.811

−1)

(−0.282) (−1.460 (0.151) (−0.596)

(−1, +1) −0.008 −1.497* 1.248 −2.746**

(−0.012) (−1.778 (1.221) (−2.026)

0 −0.403 −0.633 −0.209 −0.424

(−0.913) (−1.133 (−0.314) (−0.478)

(+1, +10) −0.992 −1.118 −0.885 −2.331

(−0.954) (−0.743 (−0.612) (−0.111)

(+1, +20) −0.798 −1.152 −0.499 −0.653

(−0.603) (−0.575 (−0.281) (−0.245)

(+11, +20) 0.193 −0.034 0.385 −0.420

(0.265) (−0.029 (0.424) (−0.286)

(−20, −2.473 −3.327 −1.751 −1.576

+20)

January, 2023 52
 (−0.866) (−1.147 (−0.374) (−0.274)

N 118 54. 64

Table 9: Reactions of the market to rumours of mergers and acquisitions involving

companies listed in China during specific event windows
This table provides the CARs of the rumoured acquisition targets as of the date of the

rumour. It is possible to quantify abnormal returns as conventional OLS market-adjusted returns

by using either the SHSE index or the SZSE individually as a proxy for the market portfolio. The

sample comprises 268 M&A rumours from the period beginning on January 1, 2004, and ending

on December 31, 2014, with a total of 149 accurate speculations and 119 erroneous rumours. In

the following, t-statistics are shown inside parenthesis. The levels of significance indicated by

***, **, and * are as follows: 0.01, 0.05, and 0.1, correspondingly.

Things that influence how the market acts are referred to as market drivers. The results of

many different regressions performed on the parameters that affect pre-rumour price run-ups are

shown in Table 10. The regressions were carried out so that the phenomenon could be studied.

Institutional ownership has a significant positive and negative impact on CARs in the stock

market during the 20-day and 10-day pre-rumour periods. This result further supports hypothesis

4 and agrees with the findings of Zivney et al. (1996), who discovered that market overreactions

to takeover rumours are more significant for companies with low levels of institutional

ownership.

The results presented here support Hypothesis 4 and agree with the findings of Zivney et

al. (1996). In addition, the data show that the only investor with a significant influence on pre-

rumour run-ups is a pressure-insensitive institutional investor. This is because institutional

January, 2023 53
investors are less susceptible to the effects of peer pressure. This is because there need to be

more pressure-sensitive individual investors in the market.

CAR (−20, −1) CAR (−10, −1)

(1) (2) (3) (4)

High-tech target −0.003 0.002 −0.009 −0.005

(−0.120) (0.063) (−0.461) (−0.235)

SOE 0.012 0.014 0.020 0.023

(0.491) (0.643) (1.140) (1.403)

True rumour 0.039** 0.044** 0.025* 0.029**

(2.162) (2.331) (1.864) (2.114)

Pressure-sensitive −0.012 −0.008

institutional ownership

(−1.611) (−1.482)

Pressure-insensitive −0.001 −0.001*

institutional ownership

(−1.016) (−1.741)

Institutional ownership −0.001* −0.001***

(−1.719) (−2.617)

Management ownership −0.052 −0.040 0.004 0.009

(−0.870) (−0.600) (0.094) (0.192)

January, 2023 54
 Firm size −0.008 −0.004 −0.004 −0.004

(−0.771) (−0.450) (−0.646) (−0.522)

Leverage −0.023 −0.039 −0.029 −0.029

(−0.398) (−0.921) (−0.564) (−0.907)

ROA −0.202 −0.266 −0.199 −0.192

(−0.809) (−1.506) (−0.847) (−1.463)

FCF/share −0.006 −0.007 −0.004 −0.004

(−1.015) (−0.978) (−1.016) (−0.850)

Tobin’s q −0.006 −0.002 0.001 0.002

(−0.995) (−0.312) (0.121) (0.368)

Year & Industry controls √ √ √ √

Cons. 0.355* 0.117 0.165 0.083

(1.688) (0.606) (1.131) (0.575)

N 196 196 196 196

R2 (%) 19.603 16.260 19.378 15.341

Adjusted (%) 5.558 6.153 5.293 5.124

Table 10: Normalization of pre-rumour abnormal returns (10,1)

January, 2023 55
 This table provides OLS regression estimates of a variety of deal- and target-specific

features vs CARs for various event windows (20, 1), (10, 1), and so on. The definitions of the

variables used in the regressions may be found in Table 1. The year-end before the date of the

M&A rumour is used for all accounting data collection purposes. The levels of significance

indicated by ***, **, and * are as follows: 0.01, 0.05, and 0.1, correspondingly.

The findings of an OLS model, including variables that impact market responses to M&A

rumour events, are shown in Table 11. This regression was performed across a (-20, +20) event

window. For the interaction between SOE and genuine rumour, we estimate a two-way

interaction term for the relationship between the two. The coefficient for SOE is statistically

significant as a positive value on its own, and the coefficient for the interaction term SOE*A true

rumour is likewise significant from a statistical point of view. This lends credence to hypothesis

3. It also suggests that investors pay more attention to SOE companies when there is a possibility

that another company may acquire them and that accurate rumours lead to more favourable

market responses for SOE companies.

(1) (2) (3) (4) (5)

High-tech target −0.011 −0.015 −0.020 −0.042 −0.020

(−0.225) (−0.300) (−0.376) (−0.815) (−0.372)

SOE 0.059* 0.058* −0.033

(1.683) (1.673) (−0.666)

True rumour 0.079*** 0.082** 0.030 0.082**

(2.815) (2.542) (0.624) (2.538)

January, 2023 56
 SOE*true rumour 0.106*

(1.659)

Pressure-sensitive institutional ownership 0.002

(0.146)

Pressure-insensitive institutional ownership −0.001

(−0.409)

Institutional ownership −0.000 −0.001

(−0.394) (−0.602)

Management ownership 0.073 0.063 0.007 0.031 0.009

(0.693) (0.611) (0.057) (0.257) (0.075)

Ownership concentration −0.001 −0.002 −0.001 −0.002 −0.001

(−1.110) (−1.515) (−0.782) (−1.324) (−0.798)

Firm size −0.011 −0.013 −0.005 −0.005

(−0.809) (−0.928) (−0.286) (−0.317)

Leverage 0.079** 0.078** 0.006 0.065** 0.007

(2.055) (2.043) (0.075) (2.017) (0.088)

ROA 0.097 0.102 −0.214 −0.212

(1.450) (1.548) (−0.683) (−0.674)

FCF/share −0.004 −0.005 −0.007 −0.007

January, 2023 57
 (−0.376) (−0.469) (−0.600) (−0.594)

Tobin’s q −0.015 −0.017 −0.013 −0.013

(−1.312) (−1.449) (−0.993) (−1.000)

Year & Industry controls √ √ √ √ √

Cons. 0.324 0.295 0.155 0.122 0.169

(1.021) (0.940) (0.394) (0.526) (0.421)

N 255 255 196 198 196

R2 (%) 12.733 15.701 16.793 16.687 16.811

Adjusted (%) 1.921 4.836 2.257 3.454 1.686

Table 11: Normative and non-normative regressions of anomalous rumour returns (20,

+20).

The following table provides OLS regression estimates of a variety of deal- and target-

specific attributes compared to CARs for various event windows (20, +20). The definitions of the

variables used in the regressions may be found in Table 1. All financial information is collected

as of the year-end, before the day when M&A rumours begin to circulate. The levels of

significance indicated by ***, **, and * are as follows: 0.01, 0.05, and 0.1, correspondingly.

January, 2023 58
CHAPTER FIVE

5.1 Conclusions

The pre-rumour price fluctuations may statistically differentiate between genuine and

phoney rumours, with authentic rumours obtaining a considerably larger number of positive

CARs than false rumours. This lends support to the theory of insider trading and knowledge

leakage. In addition, this suggests that insider trading may be responsible for the diffusion of

knowledge in China's financial markets. Market overreactions before the rumour are large for

SOE targets, but not for non-SOE targets. This discrepancy may be because SOEs are more

stable than private enterprises.

There is a potential that institutional investors need to play an active part in the decision-

making process of management. We suggest limiting administrative entities' involvement to

develop an atmosphere that enables enterprises to participate in healthy M&A deals.

January, 2023 59
CHAPTER SIX

6.1 Recommendations

Research on market responses to M & A rumours in China has been conducted. The

results indicate that such reports considerably influence the stock prices of the firms concerned.

According to one research, M&A rumours in China are linked to considerable positive

abnormal returns, particularly for the target business. Another research discovered that merger

and acquisition rumours in China are related to high volatility in the stock prices of the firms

involved, especially the target company.

Furthermore, it has been noted that the market reacts favourably to M&A announcements

in China, with the target company's stock price often increases significantly. However, this

euphoric response is often fleeting, and stock prices typically revert to pre-announcement levels

within a few months.

Reactions to merger and acquisition rumours and announcements might differ based on

the specifics of the transaction, such as the sector or industry of the firms involved and the

perceived strategic fit of the merger or purchase.

January, 2023 60
 Lastly, rumours and announcements about mergers and acquisitions (M&A) in China

significantly affect the stock prices of the companies involved. However, looking at the deal's

details before making any investment decisions is essential.

References Lists

Aggarwal, R., Erel, I., Ferreira, M., & Matos, P. (2011). Does governance travel around the

world? Evidence from institutional investors. Journal of Financial Economics, 100(1),

154–181.

Ahern, K. R., & Denis, S. (2015). Rumour has it: Sensationalism in financial media. The Review

of Financial Studies, 28(7), 2050–2093

Andrade, G., Mitchell, M., & Stafford, E. (2001). New evidence and perspectives on mergers.

Journal of Economic Perspectives, 15(2), 103–120.

Arnoldi, J., & Muratova, Y. (2019). Unrelated acquisitions in China: The role of political

ownership and political connections. Asia Pacific Journal of Management, 36 (1), 113–

134.

Bettman, J. L., Hallett, A. G., Sault, S. (2010). Rumourtrage: Can investors profit on takeover

rumours on internet stock message boards? SSRN working paper, URL:

Betton, S., Davis, F., & Walker, T. (2018). Rumour rationales: The impact of message

justification on article credibility. International Review of Financial Analysis, 58, 271–

287.

Betton, S., Eckbo, B. E., Thompson, R., & Thorburn, K. S. (2014). Merger negotiations with

stock market feedback. Journal of Finance, 69(4), 1705–1745.

January, 2023 61
Bhabra, H. S., & Huang, J. (2013). An empirical investigation of mergers and acquisitions by

Chinese listed companies, 1997–2007. Journal of Multinational Financial Management,

23(3), 186–207

Bommel, J. V. (2003). Rumours. Journal of Finance, 58(4), 1499–1520

Brockman, P., Rui, O. M., & Zou, H. (2013). Institutions and the performance of politically

connected M&As. Journal of International Business Studies, 44(8), 833–852.

Cameron, A. C., Gelbach, J. B., & Miller, D. L. (2008). Bootstrap-based improvements for

inference with clustered errors. The Review of Economics and Statistics, 90(3), 414–427.

Cao, C., Chen, Z., & Griffin, J. M. (2005). The informational content of options volume before

takeovers. Journal of Business, 78(3), 1073–1109.

Chen, C., & Kutan, A. M. (2016). Information transmission through rumours in stock markets: A

new evidence. Journal of Behavioral Finance, 17(4), 365–381.

Chi, J., Sun, Q., & Young, M. (2011). Performance and characteristics of acquiring firms in the

Chinese stock markets. Emerging Markets Review, 12(2), 152–170

Choi, S. B., Lee, S. H., & Williams, C. (2011). Ownership and firm innovation in a transition

economy: Evidence from China. Research Policy, 40(3), 441–452.

Chou, H. I., Tian, G. Y., & Yin, X. (2015). Takeover rumours: Returns and pricing of rumoured

targets. International Review of Financial Analysis, 41, 13–27.

Clarkson, P. M., Joyce, D., & Tutticci, I. M. (2006). Market reaction to takeover rumours in

internet discussion sites. Accounting and Finance, 46(1), 31–52.

Clements, M., & Singh, H. (2011). An analysis of trading in target stocks before successful

takeover announcements. Journal of Multinational Financial Management, 21(1), 1–17.

January, 2023 62
Cybo-Ottone, A., & Murgia, M. (2000). Mergers and shareholder wealth in European banking.

Journal of Banking & Finance, 24(6), 831–859.

Deng, Y., & Xu, Y. (2011). Do institutional investors have superior stock selection ability in

China? China Journal of Accounting Research, 4(3), 107–119.

Elyasiani, E., & Jia, J. (2010). Distribution of institutional ownership and corporate firm

performance. Journal of Banking & Finance, 34(3), 606–620.

Firth, M., Fung, P. M. Y., & Rui, O. M. (2007). Ownership, two-tier board structure, and

earnings informativeness–Evidence from. Journal of Accounting and Public Policy,

26(4), 463–496.

Gao, Y., & Oler, D. (2012). Rumours and pre-announcement trading: Why sell target stocks

before acquisition announcements? Review of Quantitative Finance and Accounting,

39(4), 485–508.

Gillan, S. L., & Starks, L. T. (2000). Corporate governance proposals and shareholder activism:

the role of institutional investors. Journal of Financial Economics, 57(2), 275–305

Gillan, S. L., & Starks, L. T. (2003). Corporate governance, corporate ownership, and the role of

institutional investors: A global perspective. Journal of Applied Finance, 13(2), 4–22

Hartzell, J. C., & Starks, L. T. (2003). Institutional Investors and Executive Compensation.

Journal of Finance, 58(6), 2351–2374.

Hoitash, R., & Krishnan, M. (2008). Herding, momentum, and investor overreaction. Review of

Quantitative Finance and Accounting, 30(1), 25–47.

Jabbour, A. R., Jalilvand, A., & Switzer, J. A. (2000). Pre-bid price run-ups and insider trading

activity: Evidence from Canadian acquisitions. International Review of Financial

Analysis, 9(1), 21–43.

January, 2023 63
Jarrell, G. A., & Poulsen, A. B. (1989). Stock trading before the announcement of tender offers:

Insider trading or market anticipation? Journal of Law, Economics, and Organization, 5,

225–248.

Jensen, M. C., & Ruback, R. S. (1983). The market for corporate control: The scientific

evidence. Journal of Financial Economics, 11(1–4), 5–50.

Kosfeld, M. (2005). Rumours and markets. Journal of Mathematical Economics, 41(6), 646–664.

Laouiti, M. L., Msolli, B., & Ajina, A. (2015). Buy the rumour, sell the news! What about

takeover rumours? Journal of Applied Business Research (Jabr)) 32(1), 143–160.

Ma, M., Zhang, F. (2016). Investor reaction to merger and acquisition rumours. SSRN working

paper,

Moeller, S. B., Schlingemann, F. P., & Stulz, R. M. (2004). Firm size and the gains from

acquisitions. Journal of Financial Economics, 73(2), 201–228.

Peng, M. W. (2004). Outside directors and firm performance during institutional transitions.

Strategic Management Journal, 25(5), 453–471.

Petersen, M. A. (2009). Estimating standard errors in finance panel data sets: comparing

approaches. Review of Financial Studies, 22(1), 435–480.

Pound, J., & Zeckhauser, R. (1990). Heard on the street: The effect of takeover rumors on stock

prices. The Journal of Business, 63(3), 291–308.

Schmidt, D. (2020). Stock market rumours and credibility. The Review of Financial Studies,

33(8), 3804–3853.

Sha, Y., Kang, C., & Wang, Z. (2020). Economic policy uncertainty and mergers and

acquisitions: Evidence from China. Economic Modelling, 89, 590–600.

January, 2023 64
Spiegel, U., Tavor, T., & Templeman, J. (2010). The effects of rumours on financial market

efficiency. Applied Economics Letters, 17(15), 1461–1464.

Sudarsanam, S., & Mahate, A. A. (2003). Glamour acquirers, method of payment and post-

acquisition performance: The UK evidence. Journal of Business Finance & Accounting,

30(1–2), 299–342.

January, 2023 65