Run-Up of Acquirer’s Stock in Public and Private Acquisitions

Research Question/Issue: This paper empirically examines whether there is pre-announcement movement of an acquirer’s share price and trading volume prior to the announcement of acquisitions in ways consistent with insider trading. Prior papers focus on insider trading of a target’s stock; our paper differs by examining for the first time run-up of acquirer stock, and considers both public and private acquisitions, including private-equity backed acquisitions.

Research Findings/Insights: Acquisition announcements generate predictable movements in the price of the acquirer’s stock. Pre-announcement trading of acquirer’s stock is more likely to be attributable to insider trading when the pre-announcement price changes match the expected post-announcement acquirer returns. Based on a sample of Canadian acquirers and public and private acquisition targets from Canada, the U.S. and 31 other countries over the years 1991-2008, we find evidence consistent with insider trading of acquirer’s stock.

Theoretical/Academic Implications: The evidence consistent with insider trading in this paper is limited to specific situations and is far from generalizable to all types of acquisition announcements. Post-announcement returns are typically negative for high Tobin’s q acquirers, stock transactions, and foreign targets, but positive for private equity-backed private targets. We find economically and statistically significant evidence that pre-announcement run-ups move in ways that match these expected post-announcement effects. Pre-announcement movement in acquirer stock largely depends on the type of acquisition announcement.

Practitioner/Policy Implications: Our findings have significant policy implications for the allocation of surveillance efforts for initiating insider trading investigations.

Keywords: Corporate Governance, Acquisitions, Private Equity, Insider Trading

JEL Classification: G34, K22

Suggested Citation: Suggested Citation

Cumming, Douglas J. and Li, Dan, Run-Up of Acquirer’s Stock in Public and Private Acquisitions (June 15, 2010). Corporate Governance: An International Review, 19(3), 210-239 (2011)., Available at SSRN: https://ssrn.com/abstract=1628142 or http://dx.doi.org/10.2139/ssrn.1628142