Informed trading around acquisitions: Evidence from corporate bonds

Simi Kedia; Xing Zhou

doi:10.1016/j.finmar.2013.07.002

Informed trading around acquisitions: Evidence from corporate bonds

Simi Kedia, Xing Zhou

Rutgers Business School, Finance & Economics

Research output: Contribution to journal › Article › peer-review

36 Scopus citations

Abstract

This paper examines the prevalence of informed trading in corporate bonds prior to takeover announcements. We find significant pre-announcement trading activities and price movements in target bonds, in directions consistent with the nature of pending information. Improved transparency in the bond markets achieved by the implementation of the Trade Reporting and Compliance Engine (TRACE) system reduces the incidence of informed trading. Further, there is some weak evidence that dealers affiliated with merger and acquisition advisors sell in anticipation of negative news, pointing to a possible channel of information leakage. Such negative news seems to be incorporated into bond prices no slower than into the target stocks.

Original language	English (US)
Pages (from-to)	182-205
Number of pages	24
Journal	Journal of Financial Markets
Volume	18
Issue number	1
DOIs	https://doi.org/10.1016/j.finmar.2013.07.002
State	Published - Mar 2014

All Science Journal Classification (ASJC) codes

Finance
Economics and Econometrics

Keywords

Corporate bond market
Informed trading
Merger and acquisition
Transparency

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10.1016/j.finmar.2013.07.002

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title = "Informed trading around acquisitions: Evidence from corporate bonds",

abstract = "This paper examines the prevalence of informed trading in corporate bonds prior to takeover announcements. We find significant pre-announcement trading activities and price movements in target bonds, in directions consistent with the nature of pending information. Improved transparency in the bond markets achieved by the implementation of the Trade Reporting and Compliance Engine (TRACE) system reduces the incidence of informed trading. Further, there is some weak evidence that dealers affiliated with merger and acquisition advisors sell in anticipation of negative news, pointing to a possible channel of information leakage. Such negative news seems to be incorporated into bond prices no slower than into the target stocks.",

keywords = "Corporate bond market, Informed trading, Merger and acquisition, Transparency",

author = "Simi Kedia and Xing Zhou",

note = "Funding Information: A prior version of this paper was circulated with the title “Insider Trading and Conflicts of Interest: Evidence from Corporate Bonds.” We would like to thank Andriy Bodrunak, Henrik Cronqvist, Mardi Dungey, John Griffin, Jean Helwege, Edith Hotchkiss, Kasper Meisner, Lisa Meulbroek, N.K. Chidambaran, Itzhak Venezia, Dan Weaver, and seminar participants at 2009 WFA meetings at San Diego, Rutgers University, University of Alabama, Tulane University, the Federal Reserve Board, the 2nd Corporate Governance Conference at Drexel, the 5th Swiss National Bank Workshop, the 2009 CFEA conference, and the 2010 China International Conference in Finance for helpful comments. We also thank the Whitcomb Center for financial support. ",

year = "2014",

month = mar,

doi = "10.1016/j.finmar.2013.07.002",

language = "English (US)",

volume = "18",

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journal = "Journal of Financial Markets",

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AU - Zhou, Xing

N1 - Funding Information: A prior version of this paper was circulated with the title “Insider Trading and Conflicts of Interest: Evidence from Corporate Bonds.” We would like to thank Andriy Bodrunak, Henrik Cronqvist, Mardi Dungey, John Griffin, Jean Helwege, Edith Hotchkiss, Kasper Meisner, Lisa Meulbroek, N.K. Chidambaran, Itzhak Venezia, Dan Weaver, and seminar participants at 2009 WFA meetings at San Diego, Rutgers University, University of Alabama, Tulane University, the Federal Reserve Board, the 2nd Corporate Governance Conference at Drexel, the 5th Swiss National Bank Workshop, the 2009 CFEA conference, and the 2010 China International Conference in Finance for helpful comments. We also thank the Whitcomb Center for financial support.

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AB - This paper examines the prevalence of informed trading in corporate bonds prior to takeover announcements. We find significant pre-announcement trading activities and price movements in target bonds, in directions consistent with the nature of pending information. Improved transparency in the bond markets achieved by the implementation of the Trade Reporting and Compliance Engine (TRACE) system reduces the incidence of informed trading. Further, there is some weak evidence that dealers affiliated with merger and acquisition advisors sell in anticipation of negative news, pointing to a possible channel of information leakage. Such negative news seems to be incorporated into bond prices no slower than into the target stocks.

KW - Corporate bond market

KW - Informed trading

KW - Merger and acquisition

KW - Transparency

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Informed trading around acquisitions: Evidence from corporate bonds

Abstract

All Science Journal Classification (ASJC) codes

Keywords

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