Testing the mixture of distributions hypothesis on target stocks

We test the mixture of distributions hypothesis (MDH) in which equity trading volumes and return volatilities are derived from an unobservable mixing variable, the speed of information flow to the market. Interpreting the public announcement of a takeover offer as a regime-changing firm-specific informational event, we study the daily trading volumes and price volatilities of 190 US targets from four years before the takeover announcement until the conclusion of the bid. We find strong evidence for MDH-consistent positive volume-volatility relationships before and after takeover announcements that are supportive of the applicability of the MDH in the market for corporate control.