Informed Trading Reactions to New Private Information: Evidence from Nonpublic Merger Negotiations
78 Pages Posted: 15 Nov 2011 Last revised: 5 Jun 2019
Date Written: April 26, 2019
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: Suggested Citation