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Insider trading in takeover targets

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  • Agrawal, Anup
  • Nasser, Tareque

Abstract

We examine open market stock trades by registered insiders in about 3700 targets of takeovers announced during 1988–2006 and in a control sample of non-targets, both during an ‘informed’ and a control period. Using difference-in-differences regressions of several insider trading measures, we find no evidence that insiders increase their purchases before takeover announcements; instead, they decrease them. But while insiders reduce their purchases below normal levels, they reduce their sales even more, thus increasing their net purchases. This ‘passive’ insider trading holds for each of the five insider groups we examine, for all three measures of net purchases, and is more pronounced in certain sub-samples with less uncertainty about takeover completion, such as friendly deals, and deals with a single bidder, domestic acquirer, or less regulated target. The magnitude of the increase in the dollar value of net purchases is quite substantial, about 50% relative to their usual levels, for targets' officers and directors in the six-month pre-announcement period. Our finding of widespread profitable passive trading by target insiders during takeover negotiations points to the limits of insider trading regulation. Finally, our finding that registered insiders of target firms largely refrain from profitable active trading before takeover announcements contrasts with prior findings that insiders engage in such trading before announcements of other important corporate events, and points to the effectiveness of private over public enforcement of insider trading regulations.

Suggested Citation

  • Agrawal, Anup & Nasser, Tareque, 2012. "Insider trading in takeover targets," Journal of Corporate Finance, Elsevier, vol. 18(3), pages 598-625.
  • Handle: RePEc:eee:corfin:v:18:y:2012:i:3:p:598-625
    DOI: 10.1016/j.jcorpfin.2012.02.006
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    Cited by:

    1. Kallunki, Juha-Pekka & Mikkonen, Jenni & Nilsson, Henrik & Setterberg, Hanna, 2016. "Tax noncompliance and insider trading," Journal of Corporate Finance, Elsevier, vol. 36(C), pages 157-173.
    2. Dai, Lili & Fu, Renhui & Kang, Jun-Koo & Lee, Inmoo, 2016. "Corporate governance and the profitability of insider trading," Journal of Corporate Finance, Elsevier, vol. 40(C), pages 235-253.
    3. Augustin, Patrick & Brenner, Menachem & Grass, Gunnar & Subrahmanyam, Marti G., 2016. "How do insiders trade?," CFS Working Paper Series 541, Center for Financial Studies (CFS).
    4. Denis, David J. & Xu, Jin, 2013. "Insider trading restrictions and top executive compensation," Journal of Accounting and Economics, Elsevier, vol. 56(1), pages 91-112.
    5. Agrawal, Anup & Cooper, Tommy, 2015. "Insider trading before accounting scandals," Journal of Corporate Finance, Elsevier, vol. 34(C), pages 169-190.
    6. Hillier, David & Korczak, Adriana & Korczak, Piotr, 2015. "The impact of personal attributes on corporate insider trading," Journal of Corporate Finance, Elsevier, vol. 30(C), pages 150-167.
    7. Alldredge, Dallin M. & Cicero, David C., 2015. "Attentive insider trading," Journal of Financial Economics, Elsevier, vol. 115(1), pages 84-101.
    8. Pawan Jain & Wen-Jun Xue, 2017. "Global Investigation of Return Autocorrelation and its Determinants," Working Papers 1704, Florida International University, Department of Economics.
    9. repec:eee:pacfin:v:43:y:2017:i:c:p:200-217 is not listed on IDEAS
    10. repec:eee:ecofin:v:42:y:2017:i:c:p:1-19 is not listed on IDEAS
    11. Shams, Syed M.M. & Duong, Huu Nhan & Singh, Harminder, 2016. "Information content of directors' trading around acquisitions," Pacific-Basin Finance Journal, Elsevier, vol. 38(C), pages 177-193.

    More about this item

    Keywords

    Insider trading; Takeovers; Takeover targets; Mergers and acquisitions;

    JEL classification:

    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance
    • K22 - Law and Economics - - Regulation and Business Law - - - Business and Securities Law

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