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

58 Pages Posted: 28 Feb 2021 Last revised: 19 May 2021

See all articles by Inho Suk

Inho Suk

State University of New York (SUNY) at Buffalo - School of Management; Korea University Business School (KUBS)

Mengmeng Wang

University of North Carolina (UNC) at Greensboro

Date Written: December 28, 2020

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

Suggested Citation

Suk, Inho and Wang, Mengmeng, Does Target Firm Insider Trading Signal the Target’s Synergy Potential in Mergers and Acquisitions? (December 28, 2020). Journal of Financial Economics (JFE), Forthcoming, Available at SSRN: https://ssrn.com/abstract=3760100

Inho Suk (Contact Author)

State University of New York (SUNY) at Buffalo - School of Management ( email )

342 Jacobs Management Center
Buffalo, NY 14260-4000
United States
716-645-3215 (Phone)

Korea University Business School (KUBS) ( email )

Anam-Dong, Seongbuk-Gu
Seoul 136-701, 136701
Korea

Mengmeng Wang

University of North Carolina (UNC) at Greensboro ( email )

P.O.Box 26170
Greensboro, NC 27412
United States

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