High Frequency Trading, Information, and Takeovers

Abstract

This paper (1) proposes new variables to detect informed highfrequency trading (HFT), (2) shows that HFT can help to predict takeover targets, and (3) shows that HFT influences target announcement announcement returns. Prior literature suggests that informed trade may occur before takeovers, but has not examined the role of HFT and has relied on monthly measures of informed trade (such as PIN or the spread components). I propose microstructure-based variables to detect HFT that are derived from hazard modeling and from VWAP trading algorithms. I show that these can help predict takeover targets and are significantly related to target announcement returns. This highlights the existence of pre-takeover informed trade and the need to control for it when analyzing takeover returns.