The Impact of Corporate Acquisition Announcements on Bid- Ask Quotes with Competitive Market-Makers
Posted: 2 Oct 1999
Date Written: March 1995
This paper examines changes in spread, trading activity and market-maker competition around acquisition announcements involving NASDAQ targets. We find a significant increase in spread immediately preceding the announcement, consistent with an increase in adverse selection costs. Targets with the fewest market-makers account for most of the observed increase in spread. The spread declines following the announcement, coinciding with the entry of significant additional market-makers. The results suggest that market- makers are less able to widen the spread in response to increased information trading when competition among them is high. We estimate a spread components model during normal non-event trading, and find a significantly smaller adverse selection component for high than low market-maker competition firms.
JEL Classification: G14, G34
Suggested Citation: Suggested Citation