Executive Compensation and Informed Trading in Acquiring Firms Around Merger Announcements
71 Pages Posted: 16 Feb 2015
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Executive Compensation and Informed Trading in Acquiring Firms around Merger Announcements
Date Written: February 15, 2015
Abstract
This paper analyzes informed trading in acquiring firms through (stock) merger announcements. We show that pre-announcement abnormal option volumes in acquiring firms strongly increase ahead of a stock merger (by approximately 300%). Furthermore, we show that the direction of option trades (puts or calls) prior to an announcement can predict post-announcement stock returns. Our results also indicate that higher wealth-to-performance sensitivities of top executives are related to higher abnormal put than call option trading before stock merger announcements. Overall, our results support the view that top executives have a hedging motive. They tend to purchase protection against, e.g., confounding (negative) information policies and/or empire-building mergers with negative NPVs, in order to avoid short-term salary losses (lower bonuses, lower stock options, etc.).
Keywords: Compensation, Informed Trading, M&A, Option Implied Information, Wealth-to-Performance Sensitivity
JEL Classification: D03, G14, G34, J03
Suggested Citation: Suggested Citation