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

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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.

Suggested Citation

  • Marcus Clements & Harminder Singh & Antonie Van Eekelen, 2007. "Trading in Target Stocks Before Takeover Announcements: An Analysis of Stock and Option Markets," Working Papers 2007_20, Deakin University, Department of Economics.
    • Handle: RePEc:dkn:acctwp:aef_2007_20
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    File URL: http://www.deakin.edu.au/buslaw/aef/workingpapers/papers/2007_20aef.pdf
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    Cited by:

    1. Ordu, Umut & Schweizer, Denis, 2015. "Executive compensation and informed trading in acquiring firms around merger announcements," Journal of Banking & Finance, Elsevier, vol. 55(C), pages 260-280.
    2. Soniya Mohil & Reena Nayyar & Archana Patro, 2020. "When is informed trading more prevalent?—An examination of options trading around Indian M&A announcements," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 40(6), pages 1011-1029, June.

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