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

Abstract

Manuscript Type: EmpiricalResearch 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 preannouncement 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.

Failure and success in mergers and acquisitions

“…Schwert (1996), Betzer, Gider, and Limbach (2018)). 29 Although Martynova and Renneboog (2011a) and Cumming and Li (2011) find on average no evidence of acquirer runups, the latter study does identify that runups are significantly lower for deals where the acquirer has higher Tobin's Q, for foreign targets, and for stock-financed deals, but the runups are higher for PE-backed targets. For target runups, a recent study by Betton, Eckbo, Thompson, and Thorburn (2014) finds that the relation between the pre-announcement target run-up and the offer mark-up is not necessarily one-for-one and may even be positive.…”

Failure and Success in Mergers and Acquisitions

“…Schwert (1996), Betzer, Gider, and Limbach (2018)). 29 Although Martynova and Renneboog (2011a) and Cumming and Li (2011) find on average no evidence of acquirer runups, the latter study does identify that runups are significantly lower for deals where the acquirer has higher Tobin's Q, for foreign targets, and for stock-financed deals, but the runups are higher for PE-backed targets. For target runups, a recent study by Betton, Eckbo, Thompson, and Thorburn (2014) finds that the relation between the pre-announcement target run-up and the offer mark-up is not necessarily one-for-one and may even be positive.…”

Revisiting acquirer returns: Evidence from unanticipated deals

“…If our contention (i.e., the low returns to acquirers are explained by bid anticipation) is valid, then we should find that market anticipation explains much of the declining returns to serial acquirers. Serial acquirers engage in multiple acquisitions, hence the market expects them to engage in such acquisitions in the future (Cumming and Li, 2011). 31 In a few cases, the rivals of acquirers could also be the rivals of targets and hence, for robustness, we re-estimate the results in Table 7 using a sub-sample of deals which meet any of the following criteria;…”