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

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    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.

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    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.

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    Length: 37 pages
    Date of creation: 19 Dec 2007
    Handle: RePEc:dkn:acctwp:aef_2007_20
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