Has Insider Trading Become More Rampant in the United States? Evidence from Takeovers

Insider Trading Research Handbook, S. Bainbridge, ed., Elgar, Forthcoming

U of Michigan Law & Econ Research Paper No. 12-012

47 Pages Posted: 23 Jul 2012 Last revised: 2 Aug 2012

Laura Nyantung Beny

University of Michigan Law School

H. Nejat Seyhun

University of Michigan, Stephen M. Ross School of Business

Date Written: July 11, 2012

Abstract

In this paper, we investigate whether the recent increase in enforcement action against insider trading by the SEC and the Department of Justice correspond to increased illegal insider trading activity. We examine the pricing of common stocks and options around the announcement of tender offers to detect the presence of illegal insider trading. Our objective is to determine whether illegal insider trading occurs before tender offers and whether illegal insider trading has become more rampant over time. Our evidence indicates that the pre-takeover announcement run-up in stock prices has become larger over time. During the 2006-2011 sub-period, the pre-bid run-up is 50% higher than in the pre-2006 period. We also find that toehold investments by bidders do not explain the time-series variation in stock price behavior around takeovers. In contrast, increases in implied volatility of the options on target stock are consistent with increasing illegal insider trading.

Keywords: illegal insider trading, tender offers, investments, stock price behavior, takeovers

JEL Classification: K2, O16

Suggested Citation

Beny, Laura Nyantung and Seyhun, H. Nejat, Has Insider Trading Become More Rampant in the United States? Evidence from Takeovers (July 11, 2012). Insider Trading Research Handbook, S. Bainbridge, ed., Elgar, Forthcoming; U of Michigan Law & Econ Research Paper No. 12-012. Available at SSRN: https://ssrn.com/abstract=2103673

Laura Nyantung Beny (Contact Author)

University of Michigan Law School ( email )

625 South State Street
Ann Arbor, MI 48109-1215
United States

H. Nejat Seyhun

University of Michigan, Stephen M. Ross School of Business ( email )

701 Tappan Street
Ann Arbor, MI MI 48109
United States
734-763-5463 (Phone)

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