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The Effect of Illegal Insider Trading on Takeover Premia*

The Effect of Illegal Insider Trading on Takeover Premia* This paper empirically investigates whether illegal insider trading increases the premium a bidder pays for a target. Illegal insider trading is trading by traditional corporate insiders, as well as others in a position of trust and confidence (e.g. investment bankers, lawyers), based on material, non-public information (‘inside information’). The paper examines the premia of takeovers with known illegal insider trading and compares them to a control sample of takeovers matched by industry, time period, and size that do not have detected illegal insider trading. After controlling for differences in merger characteristics, such as number of bidders, type of offer, form of payment, etc., we find that takeovers with detected illegal insider trading have takeover premia which are approximately 10 percentage points, or almost one-third, higher than the control sample. We conduct additional tests in an attempt to determine the direction of causality between illegal insider trading and takeover premia size and explore the effect of potential detection bias. The results suggest both that illegal inside traders base their trades on factors other than premia size, and that illegal insider trading in takeovers with large premia is not necessarily more likely to be detected. Our findings are consistent with the hypothesis that the illegal insider trading itself tends to create larger takeover premia. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Review of Finance Oxford University Press

The Effect of Illegal Insider Trading on Takeover Premia*

Meulbroek, Lisa K.; Hart, Carolyn
Review of Finance , Volume 1 (1) – Jan 1, 1997
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Publisher
Oxford University Press
Copyright
© Published by Oxford University Press.
ISSN
1572-3097
eISSN
1573-692X
DOI
10.1023/A:1009755324212
Publisher site
See Article on Publisher Site

Abstract

This paper empirically investigates whether illegal insider trading increases the premium a bidder pays for a target. Illegal insider trading is trading by traditional corporate insiders, as well as others in a position of trust and confidence (e.g. investment bankers, lawyers), based on material, non-public information (‘inside information’). The paper examines the premia of takeovers with known illegal insider trading and compares them to a control sample of takeovers matched by industry, time period, and size that do not have detected illegal insider trading. After controlling for differences in merger characteristics, such as number of bidders, type of offer, form of payment, etc., we find that takeovers with detected illegal insider trading have takeover premia which are approximately 10 percentage points, or almost one-third, higher than the control sample. We conduct additional tests in an attempt to determine the direction of causality between illegal insider trading and takeover premia size and explore the effect of potential detection bias. The results suggest both that illegal inside traders base their trades on factors other than premia size, and that illegal insider trading in takeovers with large premia is not necessarily more likely to be detected. Our findings are consistent with the hypothesis that the illegal insider trading itself tends to create larger takeover premia.

Journal

Review of Finance – Oxford University Press

Published: Jan 1, 1997

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