Informed Trading Reactions to New Private Information: Evidence from Nonpublic Merger Negotiations
56 Pages Posted: 15 Nov 2011 Last revised: 22 Oct 2017
Date Written: October 21, 2017
Theory provides competing predictions with regards to 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 generated. We find that informed investors immediately trade on new private information. Next, we investigate what 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 an acquisition deal.
Keywords: Mergers, acquisitions, private information, insider trading, price formation, negotiations
JEL Classification: G12, G14, G18, G34, K22
Suggested Citation: Suggested Citation