Executive Compensation and Informed Trading in Acquiring Firms Around Merger Announcements

71 Pages Posted: 16 Feb 2015

See all articles by Denis Schweizer

Denis Schweizer

Concordia University

Umut Ordu

WHU - Otto Beisheim School of Management

Multiple version iconThere are 2 versions of this paper

Date Written: February 15, 2015

Abstract

This paper analyzes informed trading in acquiring firms through (stock) merger announcements. We show that pre-announcement abnormal option volumes in acquiring firms strongly increase ahead of a stock merger (by approximately 300%). Furthermore, we show that the direction of option trades (puts or calls) prior to an announcement can predict post-announcement stock returns. Our results also indicate that higher wealth-to-performance sensitivities of top executives are related to higher abnormal put than call option trading before stock merger announcements. Overall, our results support the view that top executives have a hedging motive. They tend to purchase protection against, e.g., confounding (negative) information policies and/or empire-building mergers with negative NPVs, in order to avoid short-term salary losses (lower bonuses, lower stock options, etc.).

Keywords: Compensation, Informed Trading, M&A, Option Implied Information, Wealth-to-Performance Sensitivity

JEL Classification: D03, G14, G34, J03

Suggested Citation

Schweizer, Denis and Ordu, Umut, Executive Compensation and Informed Trading in Acquiring Firms Around Merger Announcements (February 15, 2015). Journal of Banking and Finance, Forthcoming. Available at SSRN: https://ssrn.com/abstract=2565562

Denis Schweizer (Contact Author)

Concordia University ( email )

1455 de Maisonneuve Blvd. W.
Montreal, Quebec H3G 1M8
Canada
+1 (514) 848-2424 ext. 2926 (Phone)
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HOME PAGE: http://www.concordia.ca/jmsb/faculty/denis-schweizer.html

Umut Ordu

WHU - Otto Beisheim School of Management ( email )

Burgplatz 2
Vallendar, 56179
Germany

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