Run-up of Acquirer's Stock in Public and Private Acquisitions

Manuscript Type: Empirical 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's 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 in 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 US 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's 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.