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

We develop and test the Acquisition Pvobability Hypothesis, which asserts t hat 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 outc ome of acquisition. These returns increase significantly with the magnitude of surprise about the initial acquisition, Moreover, the cross-sectional v ariation of rival abnormal returns in the announcement period is systematic ally related to variables associated with the probability of acquisition. I n addition, rivals that subsequently become targets earn significantly high er abnormal returns in the announcement period. (C) 2000 Elsevier Science S ,A. All rights reserved. JEL classification. G34; G14; G38; K21: G32.