The Source of Superior Information: M&A Advisors’ Holdings of Call Options on Targets

Abstract

This study analyzes the relationship between an M&A advisor’s holdings of call options on M&A targets before announcements and the abnormal returns of such targets. Financial institutions with regular exposure to advisory business hold call options on selected targets, for which the announcement returns are higher than those of other targets. Among targets with call options held by institutions with a regular advisory service, advisors hold call options on selected targets, and these targets have higher returns than targets with call options held by non-advisors. Although the proprietary trading teams of advisor institutions may share superior information, another source of information also exists: the advisory team within the same institution. Through investigating the Top 10 financial institutions that are active in both advisory services and proprietary trading, we find evidence to suggest a flow of information between these two units of the same institution. This practice is found in 9 of the Top 10 financial institutions.

Keywords: insider information, Chinese wall, financial institutions network, proprietary trading, M&A advisory service, M&A targets

JEL Classification: D82, G14, G21, G24