Does Target Firm Insider Trading Signal the Target’s Synergy Potential in Mergers and Acquisitions?

Abstract

We find that the acquirer’s (1) abnormal returns at merger and acquisition (M&A) announcements and (2) long-term abnormal returns after acquisitions increase with target firm insiders’ net purchase ratios. Further, acquisition synergies, measured as the (1) acquirer-target combined cumulative abnormal returns at M&A announcements and (2) changes in three-year operating performance after acquisitions, increase with target insider net purchase ratios. Notwithstanding, targets with higher insider net purchase ratios receive higher takeover premiums. Overall, our findings suggest that, even under the “Short Swing rule,” target insider trading prior to the M&A announcement serves as a credible signal for acquisition outcomes.

Keywords: insider trades; mergers and acquisitions; regulation; information asymmetry; signaling

JEL Classification: G14 ; M34; M40; M48