Sunday, December 6, 2009
Insider Trading in Takeover Targets, by Anup Agrawal, University of Alabama - Culverhouse College of Commerce & Business Administration, and Tareque Nasser, University of Alabama, was recently posted on SSRN. Here is the abstract:
Takeover announcements typically result in large increases in stock prices of target firms, providing a tempting opportunity for insider trading. Surprisingly, no prior study has examined whether the level and pattern of profitable insider trading before takeover announcements is abnormal for a broad cross-section of targets of takeovers during modern times. This paper brings large-sample evidence on this issue in an attempt to fill this gap in the literature. We examine insider trading in about 3,700 targets of takeovers announced during 1988-2006. We analyze open-market purchases, sales and net purchases of five groups of corporate insiders during the one year pre-takeover period. Using cross-sectional and time-series control samples, the paper estimates difference-in-differences regressions of several measures of the level of insider trading that control for its other determinants. We find an interesting and subtle pattern in the average pre-takeover trading behavior of target insiders. While insiders reduce both their purchases and sales below normal levels, their sales reduce more than purchases, leading to an increase in net purchases. This pattern of ‘passive’ insider trading is confined to the six-month period before takeover announcement, holds for each insider group, for all three measures of net purchases examined, and in certain sub-samples with less uncertainty about takeover completion, such as deals with a single bidder, domestic acquirer, and less regulated target. Our findings suggest that while insiders are careful about trading before major corporate events, they try to get around the restrictions on their trading activities.