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January 6th, 2010, 03:55 PM
Recent takeover activity has been characterized by broader participation in acquiror financing on both debt and equity sides. We focus on private equity buyouts, and investigate whether the number of ¯nancing participants is related to the likelihood of insider trading prior to the bid announcement. Results suggest that more insiders leads to more insider trade. We study stock, options and CDS markets. Suspicious stock and options activity is associated with more equity participants, while suspicious activity in the credit markets is associated with more debt participants. The results highlight an important channel in the °ow of information and may be consistent with models of limited competition among informed insiders. They are unlikely to be consistent with models of optimal regulation.
This paper uses a cross-section of buyout bids during 2000-2006 to examine what is essentially a time-series hypothesis. We link the variation across events in suspicious pre-bid trading to the variation in the size of the financing syndicate for the bid, and hence to the likely number of agents who would have had advance knowledge of it. We suggest that this relationship may have accounted for a secular increase in the amount of insider trade (across all deals) corresponding with trends towards broader participation in both debt and equity financing of takeovers.
In the introduction we suggested that either imperfect competition among insiders or ine±cient enforcement could lead to the ¯ndings documented here. A natural objective for future research is to attempt to distinguish between these factors. Characterizing this distinction is important both for regulatory objectives and for the general goal of understanding the dynamics of information asymmetry.
This paper uses a cross-section of buyout bids during 2000-2006 to examine what is essentially a time-series hypothesis. We link the variation across events in suspicious pre-bid trading to the variation in the size of the financing syndicate for the bid, and hence to the likely number of agents who would have had advance knowledge of it. We suggest that this relationship may have accounted for a secular increase in the amount of insider trade (across all deals) corresponding with trends towards broader participation in both debt and equity financing of takeovers.
In the introduction we suggested that either imperfect competition among insiders or ine±cient enforcement could lead to the ¯ndings documented here. A natural objective for future research is to attempt to distinguish between these factors. Characterizing this distinction is important both for regulatory objectives and for the general goal of understanding the dynamics of information asymmetry.