Advanced Search
MyIDEAS: Login

Trading in Target Stocks Before Takeover Announcements: An Analysis of Stock and Option Markets

Contents:

Author Info

  • Marcus Clements
  • Harminder Singh

    ()
    (Deakin University)

  • Antonie Van Eekelen
Registered author(s):

    Abstract

    In this study we examine both informed trading and contraire trading preceding takeover announcements on US target firms. Our findings suggest that both informed trading and contraire trading exists within the period preceding takeover announcements on both the stock and option markets as evident through abnormal returns and trading volumes. In regard to contraire trading, this study investigates possible explanations for its existence including liquidity clustering, falsely informed trading and deliberate contraire trading. The results find that bid-ask spreads actually increase over the pre-announcement period indicating that liquidity clustering is an unlikely explanation. However, through analysis of an unbiased sample of rumoured target firms, deliberate contraire trading appears both a profitable and more likely explanation for contraire trading than falsely informed trading.

    Download Info

    If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
    File URL: http://www.deakin.edu.au/buslaw/aef/workingpapers/papers/2007_20aef.pdf
    Download Restriction: no

    Bibliographic Info

    Paper provided by Deakin University, Faculty of Business and Law, School of Accounting, Economics and Finance in its series Accounting, Finance, Financial Planning and Insurance Series with number 2007_20.

    as in new window
    Length: 37 pages
    Date of creation: 19 Dec 2007
    Date of revision:
    Handle: RePEc:dkn:acctwp:aef_2007_20

    Contact details of provider:
    Postal: 221 Burwood Highway, Burwood 3125
    Phone: 61 3 9244 3815
    Web page: http://www.deakin.edu.au/buslaw/aef/index.php

    Related research

    Keywords: Informed Trading; Contraire Trading; Market Efficiency; Event Study;

    References

    References listed on IDEAS
    Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
    as in new window
    1. Dennis, Debra K. & McConnell, John J., 1986. "Corporate mergers and security returns," Journal of Financial Economics, Elsevier, vol. 16(2), pages 143-187, June.
    2. Blume, Lawrence & Easley, David & O'Hara, Maureen, 1994. " Market Statistics and Technical Analysis: The Role of Volume," Journal of Finance, American Finance Association, vol. 49(1), pages 153-81, March.
    3. David Easley & Maureen O'Hara & P.S. Srinivas, 1998. "Option Volume and Stock Prices: Evidence on Where Informed Traders Trade," Journal of Finance, American Finance Association, vol. 53(2), pages 431-465, 04.
    4. Chakravarty, Sugato & McConnell, John J., 1999. "Does Insider Trading Really Move Stock Prices?," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 34(02), pages 191-209, June.
    5. Banz, Rolf W., 1981. "The relationship between return and market value of common stocks," Journal of Financial Economics, Elsevier, vol. 9(1), pages 3-18, March.
    6. Sheikh, Aamir M & Ronn, Ehud I, 1994. " A Characterization of the Daily and Intraday Behavior of Returns on Options," Journal of Finance, American Finance Association, vol. 49(2), pages 557-79, June.
    7. Asquith, Paul, 1983. "Merger bids, uncertainty, and stockholder returns," Journal of Financial Economics, Elsevier, vol. 11(1-4), pages 51-83, April.
    8. Karpoff, Jonathan M., 1987. "The Relation between Price Changes and Trading Volume: A Survey," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 22(01), pages 109-126, March.
    9. Pound, John & Zeckhauser, Richard J, 1990. "Clearly Heard on the Street: The Effect of Takeover Rumors on Stock Prices," The Journal of Business, University of Chicago Press, vol. 63(3), pages 291-308, July.
    10. Firth, Michael, 1980. "Takeovers, Shareholder Returns, and the Theory of the Firm," The Quarterly Journal of Economics, MIT Press, vol. 94(2), pages 235-60, March.
    11. Jennifer Conrad & Cathy M. Niden, 1992. "Order Flow, Trading Costs and Corporate Acquisition Announcements," Financial Management, Financial Management Association, vol. 21(4), Winter.
    12. Mitchell, Mark L. & Mulherin, J. Harold, 1996. "The impact of industry shocks on takeover and restructuring activity," Journal of Financial Economics, Elsevier, vol. 41(2), pages 193-229, June.
    13. Cornell, Bradford & Sirri, Erik R, 1992. " The Reaction of Investors and Stock Prices to Insider Trading," Journal of Finance, American Finance Association, vol. 47(3), pages 1031-59, July.
    14. Jayaraman, Narayanan & Frye, Melissa B & Sabherwal, Sanjiv, 2001. "Informed Testing around Merger Announcements: An Empirical Test Using Transaction Volume and Open Interest in Options Markets," The Financial Review, Eastern Finance Association, vol. 36(2), pages 45-74, May.
    15. Fama, Eugene F & French, Kenneth R, 1992. " The Cross-Section of Expected Stock Returns," Journal of Finance, American Finance Association, vol. 47(2), pages 427-65, June.
    16. Fama, Eugene F, 1991. " Efficient Capital Markets: II," Journal of Finance, American Finance Association, vol. 46(5), pages 1575-617, December.
    17. Kent Daniel & David Hirshleifer & Avanidhar Subrahmanyam, 1998. "Investor Psychology and Security Market Under- and Overreactions," Journal of Finance, American Finance Association, vol. 53(6), pages 1839-1885, December.
    18. Jarrell, Gregg A & Poulsen, Annette B, 1989. "Stock Trading before the Announcement of Tender Offers: Insider Trading or Market Anticipation?," Journal of Law, Economics and Organization, Oxford University Press, vol. 5(2), pages 225-48, Fall.
    19. Franks, Julian R. & Harris, Robert S., 1989. "Shareholder wealth effects of corporate takeovers : The U.K. experience 1955-1985," Journal of Financial Economics, Elsevier, vol. 23(2), pages 225-249, August.
    20. Jensen, Michael C., 1978. "Some anomalous evidence regarding market efficiency," Journal of Financial Economics, Elsevier, vol. 6(2-3), pages 95-101.
    21. Dimson, Elroy, 1979. "Risk measurement when shares are subject to infrequent trading," Journal of Financial Economics, Elsevier, vol. 7(2), pages 197-226, June.
    22. Stephan, Jens A & Whaley, Robert E, 1990. " Intraday Price Change and Trading Volume Relations in the Stock and Stock Option Markets," Journal of Finance, American Finance Association, vol. 45(1), pages 191-220, March.
    23. Eyssell, Thomas H & Arshadi, Nasser, 1993. "Insiders, Outsiders, or Trend Chasers?: An Investigation of Pre-takeover Transactions in the Shares of Target Firms," Journal of Financial Research, Southern Finance Association & Southwestern Finance Association, vol. 16(1), pages 49-59, Spring.
    24. Charles Cao & Zhiwu Chen & John M. Griffin, 2005. "Informational Content of Option Volume Prior to Takeovers," The Journal of Business, University of Chicago Press, vol. 78(3), pages 1073-1109, May.
    25. Gallant, A Ronald & Rossi, Peter E & Tauchen, George, 1992. "Stock Prices and Volume," Review of Financial Studies, Society for Financial Studies, vol. 5(2), pages 199-242.
    26. Peter M. Clarkson & Daniel Joyce & Irene Tutticci, 2006. "Market reaction to takeover rumour in Internet Discussion Sites," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 46(1), pages 31-52.
    27. Vojislav Maksimovic, 2001. "The Market for Corporate Assets: Who Engages in Mergers and Asset Sales and Are There Efficiency Gains?," Journal of Finance, American Finance Association, vol. 56(6), pages 2019-2065, December.
    28. Fama, Eugene F. & French, Kenneth R., 1993. "Common risk factors in the returns on stocks and bonds," Journal of Financial Economics, Elsevier, vol. 33(1), pages 3-56, February.
    29. Jensen, Michael C. & Ruback, Richard S., 1983. "The market for corporate control : The scientific evidence," Journal of Financial Economics, Elsevier, vol. 11(1-4), pages 5-50, April.
    30. Back, Kerry, 1993. "Asymmetric Information and Options," Review of Financial Studies, Society for Financial Studies, vol. 6(3), pages 435-72.
    31. Brown, Stephen J. & Warner, Jerold B., 1985. "Using daily stock returns : The case of event studies," Journal of Financial Economics, Elsevier, vol. 14(1), pages 3-31, March.
    32. Barry, Christopher B. & Brown, Stephen J., 1984. "Differential information and the small firm effect," Journal of Financial Economics, Elsevier, vol. 13(2), pages 283-294, June.
    33. Keown, Arthur J & Pinkerton, John M, 1981. "Merger Announcements and Insider Trading Activity: An Empirical Investigation," Journal of Finance, American Finance Association, vol. 36(4), pages 855-69, September.
    34. Paul Draper & Krishna Paudyal, 1999. "Corporate Takeovers: Mode of Payment, Returns and Trading Activity," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 26(5&6), pages 521-558.
    35. J. Cable & K. Holland, 1999. "Modelling normal returns in event studies: a model-selection approach and pilot study," The European Journal of Finance, Taylor & Francis Journals, vol. 5(4), pages 331-341.
    36. Black, Fischer, 1972. "Capital Market Equilibrium with Restricted Borrowing," The Journal of Business, University of Chicago Press, vol. 45(3), pages 444-55, July.
    37. Anat R. Admati, Paul Pfleiderer, 1988. "A Theory of Intraday Patterns: Volume and Price Variability," Review of Financial Studies, Society for Financial Studies, vol. 1(1), pages 3-40.
    38. Mandelker, Gershon, 1974. "Risk and return: The case of merging firms," Journal of Financial Economics, Elsevier, vol. 1(4), pages 303-335, December.
    39. Meulbroek, Lisa K, 1992. " An Empirical Analysis of Illegal Insider Trading," Journal of Finance, American Finance Association, vol. 47(5), pages 1661-99, December.
    40. Biais, Bruno & Hillion, Pierre, 1994. "Insider and Liquidity Trading in Stock and Options Markets," Review of Financial Studies, Society for Financial Studies, vol. 7(4), pages 743-80.
    41. Zivney, Terry L. & Bertin, William J. & Torabzadeh, Khalil M., 1996. "Overreaction to takeover speculation," The Quarterly Review of Economics and Finance, Elsevier, vol. 36(1), pages 89-115.
    Full references (including those not matched with items on IDEAS)

    Citations

    Lists

    This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

    Statistics

    Access and download statistics

    Corrections

    When requesting a correction, please mention this item's handle: RePEc:dkn:acctwp:aef_2007_20. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Dr Xueli Tang).

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If references are entirely missing, you can add them using this form.

    If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.