Informed trading reactions to new private information: Evidence from nonpublic merger negotiations

Shane Heitzman, Sandy Klasa

Research output: Contribution to journalArticlepeer-review

Abstract

Theory provides competing predictions on whether informed investors immediately trade on newly generated private information. We address this question using Securities and Exchange Commission–mandated disclosures to identify the dates when new private information about target or acquiring firm value is created. We find that informed investors immediately trade on new private information in both the stock and options markets. Next, we investigate which factors drive the speed of these investors’ trading reactions to newly generated private information. We show that cross-sectional variation in the speed of their trading reactions can be explained by the number of privately informed investors, institutional ownership, the expected profits from informed trading and associated risk of attracting the attention of enforcement agencies, and the existence of public information about the acquisition deal.

Original languageEnglish (US)
Pages (from-to)2630-2656
Number of pages27
JournalManagement Science
Volume67
Issue number4
DOIs
StatePublished - Apr 2021

Keywords

  • Acquisitions
  • Mergers
  • Number of informed investors
  • Speed of informed trading

ASJC Scopus subject areas

  • Strategy and Management
  • Management Science and Operations Research

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