Bank Mergers and Insider Nontrading

Abstract

Insiders with nonpublic information that their firms are acquisition targets can profit by purchasing their firms' stock or by delaying planned sales of their firms' stock. Under current securities laws, insiders who execute the former strategy expose themselves to civil and criminal liability, whereas insiders who execute the latter strategy do not. Using a sample of bank mergers, we find that target bank insiders significantly decrease both share purchases and share sales before merger announcements. These findings suggest that securities laws effectively deter some forms of illegal insider trading and that insiders exploit opportunities to profit legally from nonpublic information.

Do CRA-Related Events Affect Shareholder Wealth? The Case of Bank Mergers

“…positive abnormal returns associated with the announcement of a merger, whereas bidder banks experience no significant abnormal returns in response to a merger announcement. Using the two-day event window as an example, target banks experience an average return of 13.14% at the announcement of a merger, similar to previous results such as the 10.45% reported by Madison, Roth, and Saporoschenko (2004) for target banks in 1991-1997. Bidder banks experience a slight insignificant loss.…”

Insider trading in takeover targets

“…They find an increase in the aggregate number of net insiders buying (= number buying − number selling) over the year preceding the announcement for management-led buyouts, but not for other buyouts. Madison et al (2004) examine a sample of 111 target firms in bank mergers during 1991-1997. They find that insiders reduce their purchases as well as sales in the two months prior to merger announcements.…”

“…While Agrawal and Jaffe (1995) examine whether the level of trading by top managers in takeover targets is abnormal, they study a historical time period, 1941-1961, before modern insider trading laws started to be enforced against stock exchange transactions. Two other studies analyze insider trading in specialized groups of takeover targets: Harlow and Howe (1993) study leveraged buyouts (LBOs) and Madison et al (2004) examine bank mergers. We provide a more detailed review of the related literature in Section 3 below.…”

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

“…In Cybo‐Ottone and Murgia's (2000) study of European M&A from 1988 to 1997, the paper finds that European banker acquirers see it abnormal price increase in its stock over the window [−20, 0], though insignificant. Madison, Roth, & Saporoschenko (2004) focus on bank insiders' purchase and sell before acquisition announcement made between 1991 and 1997. Using the actual banks' corporate insider trading data, the paper provides evidence suggesting that target bank insiders decrease their purchase and selling activity in the two months before the initial announcement.…”