Insider Trading in Rumored Takeover Targets

Abstract

We examine insider trading surrounding takeover rumors in a sample of 1,642 publicly traded U.S. firms. Using difference-in-differences regressions, we find that insider net purchases increase within the year prior to the first publication of a takeover rumor, particularly when rumor articles are either accurate (lead to a takeover announcement) or informative (provide substantial justification for the rumor’s publication). Moreover, we find abnormal insider trading to be a significant predictor of takeover announcements occurring within the following year. Finally, passive net purchasing (i.e., selling less rather than buying more) is more pronounced among managing insiders than among non-managing insiders.

Keywords: Insider trading, takeover rumors, information asymmetry, takeover announcements, mergers and acquisitions

JEL Classification: G14; G18; G34; K22