Abstract
We investigate three issues about the impact of insider trades and institutional holdings on mergers and acquisitions (M&As). First, we test how insider trades affect the trading behavior of institutional investors in M&As. Second, we test whose trading behavior, either insiders or institutional investors, has greater explanatory power for the performance of M&A firms after takeover announcements. Third, we analyze the industry-wide spillover effects of insider trades and institutional holdings. Empirically, we find that insiders and institutional investors of M&A firms may utilize similar information in their transactions because insider trades induce similar trading behavior for institutional investors. In addition, insider trades, relative to institutional holdings, have greater explanatory power for M&A firm's long-term performance. Finally, compared with insider trades, institutional holdings have a more significant spillover effect in the industry of M&A firms.
Highlights
Information asymmetry between managers and investors is a fundamental issue for investors and market observers
The empirical results show that insider transactions have a significant impact on the institutional holdings
We find that institutional investors significantly decrease holdings of acquiring firms as insider transactions with the negative net sell of insider transactions
Summary
Information asymmetry between managers and investors is a fundamental issue for investors and market observers. Due to the different characteristics of information sources, we test whose trading behavior, either insiders or institutional investors, has greater explanatory power for long-term performance after M&As. Allen[28] finds that the trades of insiders are significantly related to post-spin-off stock returns, takeovers, and delistings of spin-off firms. We measure the insider trades and the institutional holdings before and after M&As and analyze the impact of the trading behavior of both groups on the long-term performance, which is measured by the buy-and-hold abnormal returns This analysis contributes to the related literature of understanding the prediction power of informed traders on a firm's market performance after M&As. Third, we analyze the industry-wide spillover effect of insider trades and institutional holdings.
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