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More Insiders, More Insider Trading: Evidence from Private Equity Buyouts

  • Acharya, Viral V
  • Johnson, Tim

Recent takeover activity has been characterized by broader participation in acquiror financing on both debt and equity sides. We focus on private equity buyouts, and investigate whether the number of financing participants is related to the likelihood of insider trading prior to the bid announcement. Results suggest that more insiders leads to more insider trade. We study stock, option, bond, and CDS markets. Suspicious stock and options activity is associated with more equity participants, while suspicious activity in the credit markets is associated with more debt participants. The results highlight an important channel in the flow of information and may be consistent with models of limited competition among informed insiders. They are unlikely to be consistent with models of optimal regulation.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 6622.

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Date of creation: Dec 2007
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Handle: RePEc:cpr:ceprdp:6622
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  1. Acharya, Viral V & Johnson, Tim, 2005. "Insider Trading in Credit Derivatives," CEPR Discussion Papers 5180, C.E.P.R. Discussion Papers.
  2. Edward I. Altman, 2007. "Global Debt Markets in 2007: New Paradigm or the Great Credit Bubble?," Journal of Applied Corporate Finance, Morgan Stanley, vol. 19(3), pages 17-31.
  3. Edward E. Glaeser & Bruce Sacerdote & Jose A. Scheinkman, 1995. "Crime and Social Interactions," Harvard Institute of Economic Research Working Papers 1738, Harvard - Institute of Economic Research.
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  9. Allen M. Poteshman, 2006. "Unusual Option Market Activity and the Terrorist Attacks of September 11, 2001," The Journal of Business, University of Chicago Press, vol. 79(4), pages 1703-1726, July.
  10. Charles Quanwei Cao & Zhiwu Chen & John M. Griffin, 2003. "Informational Content of Option Volume Prior to Takeovers," Yale School of Management Working Papers ysm422, Yale School of Management.
  11. 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.
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  13. Amihud, Yakov, 2002. "Illiquidity and stock returns: cross-section and time-series effects," Journal of Financial Markets, Elsevier, vol. 5(1), pages 31-56, January.
  14. Baruch, Shmuel, 2002. "Insider trading and risk aversion," Journal of Financial Markets, Elsevier, vol. 5(4), pages 451-464, October.
  15. Foster, F Douglas & Viswanathan, S, 1996. " Strategic Trading When Agents Forecast the Forecasts of Others," Journal of Finance, American Finance Association, vol. 51(4), pages 1437-78, September.
  16. Meulbroek, Lisa K, 1992. " An Empirical Analysis of Illegal Insider Trading," Journal of Finance, American Finance Association, vol. 47(5), pages 1661-99, December.
  17. 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.
  18. Viral V. Acharya & Julian Franks & Henri Servaes, 2007. "Private Equity: Boom and Bust?," Journal of Applied Corporate Finance, Morgan Stanley, vol. 19(4), pages 44-53.
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