Informed Institutional Trading around Merger and Acquisition Announcements

The Journal of Trading, Vol. 6, No 2, pp. 35-49, Spring 2011

Posted: 31 Jan 2012

See all articles by Hazem Daouk

Hazem Daouk

Cornell University - School of Applied Economics and Management

Guohua Li

Cornell University - School of Applied Economics and Management

Date Written: January 1, 2011

Abstract

Merger and Acquisition (M&A) activities are not well-anticipated corporate events in the equity market. Do institutional investors possess material non-public information before M&A announcements? Using a novel methodology that infers high frequency institutional trading, this paper investigates the daily trading behavior of institutional investors in target firms before and after M&A announcements in the US equity market from 1993 to 2004. The methodology is based on combining two publicly available datasets: the NYSE Trades and Quotes (TAQ) dataset and the institutional ownership report (13F). I find that all institutional investors start to accumulate net buying positions in target firms as far as 30 days before an announcement date. Institutional investors are not a homogeneous group in terms of trading strategies, regulations or information venues, but, surprisingly, they exhibit similar trading patterns prior to the event. This trading pattern indicates that institutional investors may possess material non-public information. On and after the announcement day, investment advisors tend to be merger arbitragers and buy more shares of target firm stocks to speculate on final deal consummation; while banks, insurance companies, and mutual funds immediately reverse their positions to cash in, a behavior consistent with the early informed traders acting as “short-term profit takers”. I rule out the possibility of market-wide information leak prior to the event because prices of target firms do not show any significant price run-ups. Also, the fact that institutions are net sellers in rival firms of targets before the announcement, allows us to rule out the possibility that institutional investors have better models to predict possible takeovers, rather than inside information. Finally, I show that the trading by institutions before M&A announcements is associated with a higher probability of informed trading (PIN), for the firms they trade.

Keywords: institutional trading, informed trading, merger and acquisitions

JEL Classification: G14, G20, G34

Suggested Citation

Daouk, Hazem and Li, Guohua, Informed Institutional Trading around Merger and Acquisition Announcements (January 1, 2011). The Journal of Trading, Vol. 6, No 2, pp. 35-49, Spring 2011, Available at SSRN: https://ssrn.com/abstract=1458417 or http://dx.doi.org/10.2139/ssrn.1458417

Hazem Daouk

Cornell University - School of Applied Economics and Management ( email )

446 Warren Hall
Ithaca, NY 14853
United States
331-45-78-63-88 (Fax)

HOME PAGE: http://courses.cit.cornell.edu/hd35/

Guohua Li (Contact Author)

Cornell University - School of Applied Economics and Management ( email )

248 Warren Hall
Ithaca, NY 14853
United States

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