Executive Compensation and Informed Trading in Acquiring Firms around Merger Announcements

70 Pages Posted: 12 Jan 2013 Last revised: 14 Nov 2014

See all articles by Umut Ordu

Umut Ordu

WHU - Otto Beisheim School of Management

Denis Schweizer

Concordia University

Multiple version iconThere are 2 versions of this paper

Date Written: December 18, 2013

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 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, J3

Suggested Citation

Ordu, Umut and Schweizer, Denis, Executive Compensation and Informed Trading in Acquiring Firms around Merger Announcements (December 18, 2013). Available at SSRN: https://ssrn.com/abstract=2199565 or http://dx.doi.org/10.2139/ssrn.2199565

Umut Ordu

WHU - Otto Beisheim School of Management ( email )

Burgplatz 2
Vallendar, 56179
Germany

Denis Schweizer (Contact Author)

Concordia University ( email )

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Canada
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+1 (514) 848-4500 (Fax)

HOME PAGE: http://www.concordia.ca/jmsb/faculty/denis-schweizer.html

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