Run-Up of Acquirer’s Stock in Public and Private Acquisitions
Corporate Governance: An International Review, 19(3), 210-239 (2011).
54 Pages Posted: 22 Jun 2010 Last revised: 22 Nov 2014
Date Written: June 15, 2010
Manuscript Type: Empirical
Research Question/Issue: This paper empirically examines whether there is pre-announcement movement of an acquirer’s share price and trading volume prior to the announcement of acquisitions in ways consistent with insider trading. Prior papers focus on insider trading of a target’s stock; our paper differs by examining for the first time run-up of acquirer stock, and considers both public and private acquisitions, including private-equity backed acquisitions.
Research Findings/Insights: Acquisition announcements generate predictable movements in the price of the acquirer’s stock. Pre-announcement trading of acquirer’s stock is more likely to be attributable to insider trading when the pre-announcement price changes match the expected post-announcement acquirer returns. Based on a sample of Canadian acquirers and public and private acquisition targets from Canada, the U.S. and 31 other countries over the years 1991-2008, we find evidence consistent with insider trading of acquirer’s stock.
Theoretical/Academic Implications: The evidence consistent with insider trading in this paper is limited to specific situations and is far from generalizable to all types of acquisition announcements. Post-announcement returns are typically negative for high Tobin’s q acquirers, stock transactions, and foreign targets, but positive for private equity-backed private targets. We find economically and statistically significant evidence that pre-announcement run-ups move in ways that match these expected post-announcement effects. Pre-announcement movement in acquirer stock largely depends on the type of acquisition announcement.
Practitioner/Policy Implications: Our findings have significant policy implications for the allocation of surveillance efforts for initiating insider trading investigations.
Keywords: Corporate Governance, Acquisitions, Private Equity, Insider Trading
JEL Classification: G34, K22
Suggested Citation: Suggested Citation