Informed Trading Reactions to New Private Information: Evidence from Nonpublic Merger Negotiations

78 Pages Posted: 15 Nov 2011 Last revised: 5 Jun 2019

See all articles by Shane Heitzman

Shane Heitzman

University of Southern California - Marshall School of Business

Sandy Klasa

University of Arizona - Department of Finance

Date Written: April 26, 2019

Abstract

Theory provides competing predictions on the question of whether informed investors immediately trade on newly generated private information. We address this question using SEC-mandated disclosures to identify the dates when new private information about target or acquiring firm value is created. We find that informed investors immediately trade on new private information in both the stock and options markets. Next, we investigate which factors drive the speed of these investors’ trading reactions to newly generated private information. We show that cross-sectional variation in the speed of their trading reactions can be explained by the number of privately informed investors, institutional ownership, the expected profits from informed trading and associated risk of attracting the attention of enforcement agencies, and the existence of public information about the acquisition deal.

Keywords: Mergers, acquisitions, private information, insider trading, price formation, negotiations

JEL Classification: G12, G14, G18, G34, K22

Suggested Citation

Heitzman, Shane and Klasa, Sandy, Informed Trading Reactions to New Private Information: Evidence from Nonpublic Merger Negotiations (April 26, 2019). Available at SSRN: https://ssrn.com/abstract=1938436 or http://dx.doi.org/10.2139/ssrn.1938436

Shane Heitzman (Contact Author)

University of Southern California - Marshall School of Business ( email )

701 Exposition Blvd
Los Angeles, CA 90089
United States

Sandy Klasa

University of Arizona - Department of Finance ( email )

McClelland Hall
P.O. Box 210108
Tucson, AZ 85721-0108
United States
520-621-8761 (Phone)

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