The source of gains to targets and their industry rivals: Evidence based on terminated merger proposals

We examine merger gains to targets and their industry rivals and find evide nce consistent with the signaling hypothesis. We find that targets and riva ls benefit from the merger announcement, but termination results in signifi cant negative returns for targets and significant positive returns for riva ls. Termination gains to rivals support the hypothesis that rival firms cou ld become acquisition targets. The gains are positively related to subseque nt acquisition activity involving the target and the extent of merger activ ity in the industry, and are inversely related to the relative size of the target rivals, the presence of competing bidders, and the regulatory enviro nment.