Do Directors’ Trades Matter for the Announcement Period Performance of Acquiring Firms? The Australian Evidence

Abstract

This study investigates the relation between acquiring firm director trading (net sales, net purchases or no trade) and share market reaction to merger and acquisition announcement (M&A). This provides an initial sample of 658 M&A announcements by Australian acquiring firms between 2003 and 2012. We find that on average acquiring firms earn significant positive abnormal returns around M&A announcement. Further, acquiring firms with no director trading outperform acquiring firms with net director purchases or net director sales (univariate results) that take place prior to M&A announcements. These results are robust to inclusion of firm characteristics, deal characteristics, prior returns and fixed industry & year effect. We also find evidence of a size effect with respect to director trading. Larger acquiring firms with net director sales or net director purchases earn higher abnormal returns than smaller acquiring firms around the announcement date. Our results are robust to choice of director trading period prior to an M&A announcement (12 months, 6 months and 3 months). Our results are also robust after inclusion of first deals from multiple M&A. Finally, we find evidence that the results are sensitive to whether the acquiring firm is a growth or value firm and whether the target is publicly listed or not.

Keywords: Director trading, Mergers and Acquisition, Event Study, Acquiring Firm

JEL Classification: G32, G34