Informed Trading around Acquisitions: Evidence from Corporate Bonds

Abstract:     
This paper examines the prevalence of informed trading in the corporate debt market prior to takeover announcements. Unlike target stocks, target bonds do not always gain in an acquisition. Target bonds rated higher than the acquirer’s stand to lose whereas those rated lower stand to gain. We find significant pre-announcement trading activities and price movements in target bonds, in directions consistent with the nature of pending information. Since selling (buying) target bonds that stand to lose (gain) prior to the public announcement requires information about acquirer characteristics, our evidence is less likely to be due to market anticipation, and is consistent with informed trading. We find that improved transparency in the bond markets achieved by the implementation of the TRACE system reduces the incidence of informed trading. Further, there is some weak evidence that bond dealers affiliated with M&A advisors sell in anticipation of negative news on bonds, pointing to a possible channel of information leakage. Such negative news seems to be incorporated into bond prices no slower than into the target stocks.

Number of Pages in PDF File: 40

Keywords: Conflict of Interest, Investment Banking, Mergers and Acquisition, Insider Trading, Corporate Bonds

JEL Classification: G18, G24, G34

working papers series