I only fear when I hear: How media affects insider trading in takeover targets

Abstract

We study how target firm insiders respond to Wall Street Journal articles referring to illegal insider trading in past mergers. Such articles lead to target insider share purchases before bid announcement to drop by 75%. This effect is stronger nearer the bid announcement and increases with article visibility. It remains significant after controlling for public enforcement intensity, but is weakened by the greater potential for profitable trading. Our results suggest insider trading articles temporarily heighten the perception of litigation and reputation risks. Overall, our study indicates that such articles have a meaningful short-term deterrence effect on opportunistic insider trading, and highlights the disciplinary role of the media. • We document a deterrence effect of media on insider trading. • Insider purchases before M&A drop 75% after WSJ news on past insider trading cases. • Articles temporarily heighten perception of litigation and reputation risks. • Effect is stronger nearer bid and increases with article visibility. • Effect remains unaffected by enforcement but weakened by potential trading profits.