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Informed trading around acquisitions: Evidence from corporate bonds

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  • Kedia, Simi
  • Zhou, Xing

Abstract

This paper examines the prevalence of informed trading in corporate bonds prior to takeover announcements. We find significant pre-announcement trading activities and price movements in target bonds, in directions consistent with the nature of pending information. Improved transparency in the bond markets achieved by the implementation of the Trade Reporting and Compliance Engine (TRACE) system reduces the incidence of informed trading. Further, there is some weak evidence that dealers affiliated with merger and acquisition advisors sell in anticipation of negative news, pointing to a possible channel of information leakage. Such negative news seems to be incorporated into bond prices no slower than into the target stocks.

Suggested Citation

  • Kedia, Simi & Zhou, Xing, 2014. "Informed trading around acquisitions: Evidence from corporate bonds," Journal of Financial Markets, Elsevier, vol. 18(C), pages 182-205.
    • Handle: RePEc:eee:finmar:v:18:y:2014:i:c:p:182-205
    DOI: 10.1016/j.finmar.2013.07.002
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    Cited by:

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    3. Osano, Hiroshi, 2020. "Credit default swaps and market information," Journal of Financial Markets, Elsevier, vol. 48(C).
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    5. Patrick Augustin & Menachem Brenner & Marti G. Subrahmanyam, 2019. "Informed Options Trading Prior to Takeover Announcements: Insider Trading?," Management Science, INFORMS, vol. 65(12), pages 5697-5720, December.
    6. Augustin, Patrick & Brenner, Menachem & Grass, Gunnar & Subrahmanyam, Marti G., 2016. "How do insiders trade?," CFS Working Paper Series 541, Center for Financial Studies (CFS).
    7. Ben-David, Itzhak & Birru, Justin & Rossi, Andrea, 2019. "Industry familiarity and trading: Evidence from the personal portfolios of industry insiders," Journal of Financial Economics, Elsevier, vol. 132(1), pages 49-75.
    8. Ziming Meng & Xin Wang, 2021. "The Effects of Outbound Mergers and Acquisitions (M&As) on Chinese Automobile Corporations’ Performance: A Case Study of Geely’s Acquisition of Volvo," International Business Research, Canadian Center of Science and Education, vol. 14(7), pages 1-36, July.
    9. Hao, (Grace) Qing, 2016. "Is there information leakage prior to share repurchase announcements? Evidence from daily options trading," Journal of Financial Markets, Elsevier, vol. 27(C), pages 79-101.
    10. Czech, Robert & Pintér, Gábor, 2020. "Informed trading and the dynamics of client-dealer connections in corporate bond markets," Bank of England working papers 895, Bank of England, revised 20 Jan 2022.
    11. Wei Hao & Andrew Prevost & Udomsak Wongchoti, 2018. "Are Low Equity R2 Firms More or Less Transparent? Evidence from the Corporate Bond Market," Financial Management, Financial Management Association International, vol. 47(4), pages 865-909, December.
    12. Haselmann, Rainer & Leuz, Christian & Schreiber, Sebastian, 2021. "Know Your Customer: Relationship Lending and Bank Trading," LawFin Working Paper Series 22, Goethe University, Center for Advanced Studies on the Foundations of Law and Finance (LawFin).
    13. Betzer, André & Gider, Jasmin & Limbach, Peter, 2022. "Do financial advisors matter for M&A pre-announcement returns?," CFR Working Papers 22-03, University of Cologne, Centre for Financial Research (CFR).
    14. Hyoseok (David) Hwang, 2019. "Informed Trading of Mutual Funds: Evidence from Fund‐Underwriter Relationships," Financial Management, Financial Management Association International, vol. 48(1), pages 311-338, March.
    15. Augustin, Patrick & Brenner, Menachem & Grass, Gunnar & Orłowski, Piotr & Subrahmanyam, Marti G., 2023. "Informed options strategies before corporate events," Journal of Financial Markets, Elsevier, vol. 63(C).
    16. Yamani, Ehab, 2023. "Return–volume nexus in financial markets: A survey of research," Research in International Business and Finance, Elsevier, vol. 65(C).
    17. Chy, Mahfuz & Kyung, Hoyoun, 2023. "The effect of bond market transparency on bank loan contracting," Journal of Accounting and Economics, Elsevier, vol. 75(2).
    18. Augustin, Patrick & Brenner, Menachem & Grass, Gunnar & Orłowski, Piotr & Subrahmanyam, Marti G., 2022. "Informed options strategies before corporate events," LawFin Working Paper Series 39, Goethe University, Center for Advanced Studies on the Foundations of Law and Finance (LawFin).
    19. Bing Han & Gang Li, 2021. "Information Content of Aggregate Implied Volatility Spread," Management Science, INFORMS, vol. 67(2), pages 1249-1269, February.
    20. Yao-Min Chiang & Michelle Lowry & Yiming Qian, 2019. "The Information Advantage of Underwriters in IPOs," Management Science, INFORMS, vol. 65(12), pages 5721-5740, December.
    21. Ivashchenko, Alexey, 2024. "Corporate bond price reversals," Journal of Financial Markets, Elsevier, vol. 68(C).

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    More about this item

    Keywords

    Informed trading; Merger and acquisition; Corporate bond market; Transparency;
    All these keywords.

    JEL classification:

    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance

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