Abnormal trading by advisory banks before M&A announcements: coincidence, skills or insider trading?

ABNORMAL TRADING BY ADVISORY BANKS BEFORE M&A ANNOUNCEMENTS: COINCIDENCE, SKILLS OR INSIDER TRADING? PURPOSE OF THE STUDY In a merger and acquisition (M&A), acquirer’s advisory banks are believed to have information about the target beforehand. This study investigates whether the banks exploit this inside information to increase their holdings in the target firm before the public announcement. DATA The institutional holdings data are collected from the quarterly 13F fillings of SEC via WRDS database. The M&A data are collected from SDC Platinum. Other supporting data such as share prices, deal characteristics and company characteristics are acquired from SDC Platinum, Thomson One Banker, CRSP and COMPUSTAT. The final data set consists of 1064 cases for insider trading investigation from 715 M&As. RESULTS The main findings suggest that advisory banks do increase their holdings in the targets before takeover announcements. These increases have already been benchmarked against those of the advisory banks in targets’ peers. On average, the banks start accumulating targets’ shares since 11 quarters before the announcement. However, their changes in holdings in the targets during the last five quarters immediately prior to the takeover are positive, but not statistically significant. In addition, the results of this study suggest a positive relationship between the trading behavior of the advisory banks and the target premium. KEYWORDS Insider trading, investment bank, merger and acquisition, 13F filling