Why M&A Rumors Cause a Dip in Firm Productivity

Rumors are common in financial markets and often relate to mergers and acquisitions (M&A). While the majority of M&A rumors originate from speculation or opinion pieces (Jia et al., 2020) and never turn into deal announcements, academic research finds that they are associated with significant stock price reactions (e.g., Ahern and Sosyura, 2015; Betton, Davis, and Walker, 2018). Since M&A rumors are disruptive events that are associated with job loss and organizational change, it is worth examining their heretofore unknown operational consequences for the firms and people involved. In this study, we use thousends of M&A rumors between 1999 and 2018 to examine how firm productivity changes after rumors surface.

Both anecdotal and interview-based academic evidence suggest that M&A rumors may have significant consequences for the firms and people involved (e.g., Schweiger, Ivancevich, and Power, 1987; Burlew, Pedersen, and Bradley, 1994). These consequences include anxiety, distraction, and stress as well as a reduction in employees’ morale and commitment to their work, all of which result from the implicit threat of job loss and wage reductions that come with M&A. As research has shown, this threat is real because labor restructuring is the key driver of M&A and the associated synergy gains (e.g., Jensen, 1988; Dessaint, Golubov, and Volpin, 2017). As a result, M&A rumors can cause firm productivity to decline as they may have adverse effects on firms’ employees and managers. In some cases, though, they may have the oppposit effect: The threat of job loss may cause people to work harder and, as a result,  productivity to improve. Hence, how firm productivity changes when M&A rumors surface is an empirical question.

In a new paper, we address this question, focusing on M&A rumors that do not result in public bids within at least two years and that involve acquirer or target firms headquartered in the 36 OECD countries. We find a significant dip in firm productivity in reaction to these rumors. Firms affected by rumors show a decline in several productivity measures (e.g., the sales to employees ratio and the gross profit margin) in the quarter during which the M&A rumor surfaces or in the two succeeding quarters. We validate our findings by conducting a battery of robustness checks, including several matching approaches to make firms with and without M&A rumors more comparable. We also find no indication that firms that are the subject of rumors perform worse than other firms before those rumors arise.

We also provide cross-sectional evidence supporting the notion that rumors harm firm productivity due to adverse effects on the firm’s employees. More specifically, we find that the decline in firm productivity is more pronounced in instances in which employees have greater reason to fear job loss and other adverse affects of M&A. Productivity declines more for target firms than for acquiring firms and for firms in countries with less employment protection, less collective bargaining rights, and societies less oriented toward the long-term.

Finally, we examine the potential wealth implications of M&A rumors for shareholders. Consistent with prior academic literature and with the notion that M&A rumors constitute credible takeover threats, we find a significantly positive average stock price reaction to rumor announcements. Importantly, stock returns over the subsequent quarters mirror our results on the declining productivity of firms after M&A rumors surface. Returns are significantly negative over the three quarters after the rumor surfaces and they outweigh the positive announcement effect of the rumor, being about twice as large. Thus, market participants do not only reverse the stock price increase upon rumor announcements, but also reduce the stock price to a level below what was before the announcements.This result is more pronounced for target firms and firms located in countries with low employment protection.

The evidence enhances our understanding of the real effects of rumors, the role of human capital in M&A, and the dark side of the market for corporate control. In this sense, our paper contributes to the debate about the regulation of the market for corporate control, such as the 2011 reform of the UK anti-takeover regulation triggered by the drawn-out takeover of Cadbury by Kraft Foods. Our results imply that limiting the time during which firms can be “in play” and subject to  M&A rumors or pending bids, as is the case in the UK, may – on average – benefit employees and shareholders. It also suggests that research on the costs and benefits of takeover regulation should take into account the human capital dimension and the related productivity effects for the firms involved.


Ahern, K.R., and Sosyura, D., 2015, Rumor has it: Sensationalism in financial media, Review of Financial Studies 28, 2050-2093.

Betton, S., Davis, F., and Walker, T., 2018, Rumor rationales: The impact of message justification on article credibility, International Review of Financial Analysis 58, 271- 287.

Burlew, L.D., Pederson, J.E., and Bradley, B., 1994, The reaction of managers to the preacquisition stage of a corporate merger: A qualitative study, Journal of Career Development 21, 11-22.

Dessaint, O., Golubov, A., and Volpin, P., 2017, Employment protection and takeovers, Journal of Financial Economics 125, 369-388.

Jensen, M.C., 1988, Takeovers: Their causes and consequences, Journal of Economic Perspectives 2, 21-48.

Jia, W., Redigolo, G., Shu, S., and Zhao, J., 2020, Can social media distort price discovery? Evidence from merger rumors, Journal of Accounting and Economics 70, forthcoming.

Schweiger, D.M., Ivancevich, J.M., and Power, F.R., 1987, Executive actions for managing human resources before and after acquisition, Academy of Management Executive 1, 127- 138.

This post comes to us from Christian Andres at WHU – Otto Beisheim School of Management, Dmitry Bazhutov at BUW – Schumpeter School of Business and Economics, Douglas Cumming at Florida Atlantic University, and Peter Limbach at the University of Cologne and Centre for Financial Research (CFR). It is based on their recent article, “The M&A Rumor Productivity Dip,” available here.

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