Do Cross-Border Mergers and Acquisitions Import More Aggressive Insider Trading?

Abstract

Foreign acquirers own private information about domestic targets in cross-border M&As. Has this led to more aggressive insider trading by foreign insiders on domestic markets due to barriers to cross-border law enforcement? Using a sample of 10,600 M&As around the world between 1990 and 2017, we find that the answer is yes. Abnormal trading in target firm securities before the announcements of cross-border deals, in which foreigners are known to possess insider information, is systematically higher than that before the announcements of domestic deals, in which foreigners are less likely to possess insider information. The difference is mainly driven by cross-border deals in which the acquirer is from a country with high corruption and low social norms, and where the target is in a country with stricter insider trading law enforcement. Using the staggered entering into the Multilateral Memorandum of Understanding (MMoU) of 2002 by securities regulators around the world as a shock to increased coordination among securities regulators, we find that the entering into the MMoU by a country pair significantly reduces abnormal trading before cross-border deals between the country pair relative to other country pairs. Our evidence reveals a dark side of globalization and suggests that maintaining integrity in domestic securities markets cannot be done by a single country in this globalization era.

Keywords: Insider Trading, Cross-Border, Mergers and Acquisitions, Globalization, Law, Cultural Norms

JEL Classification: G34, G38, K22, K4