Intra‐Industry Transfers of Implied Volatility Information Around Mergers and Acquisitions

ABSTRACT We examine whether merger announcements convey information relevant to rival firms' return volatility, in addition to that about returns. We find that the changes in option implied volatility of the merger targets around deal announcement are positively and significantly related to the changes in option implied volatility of their industry rivals, consistent with the transfer of volatility information. Our results are obtained after controlling for the transfer of return information, contemporaneous market‐wide volatility, as well as other volatility determinants. We also find that the magnitude of volatility information transfer is significantly stronger for those rivals (i) identified ex ante by the market as most likely to be subsequently acquired, (ii) that subsequently receive a takeover bid, or (iii) that have a financial profile that is similar to that of the merger targets. We interpret the evidence to be consistent with the acquisition probability hypothesis.