Insider Trading in Mergers and Acquisitions in U.K., U.S., and China

Abstract

This thesis focuses on the the study of insider trading based on three main economic regions- the U.K, the U.S and China. This is a key aspect of corporate governance and one where the regulatory systems differ substantially in the three countries analysed. Four filters have been developed in helping the regulatory authority detect the existence of insider trading. The first filter is to analyse the Average Abnormal Return (AR) and the Cumulative Average Abnormal Return (CAAR). If there are no unusual price movements prior to the announcement date, one would expect both the AR and CAAR to fluctuate randomly about zero. However, if there is leakage of, and trading on, inside information just prior to the announcement date, this should show up in the form of positive daily average residuals as t approaches 0 and a corresponding build up in CAAR. Dummy variables are also included in the first filter. This filter captures unusual stock price run-ups on a series of days but may miss the ones on single days. As a result, more filters are developed. The second filter is the news search. Hirshleifer (1971) and Fama and Laffer (1971) found that those who possess privileged information have an inventive to take market positions on the basis of their information and then announce their information publicly. I consider two situations in this thesis-firstly, the public news released before the problematic day and secondly, the public news released after the problematic day. The investigation of outliers is used as the third filter in this thesis. The residuals which are 3.5 or 4 times greater than the standard deviation are considered as the outliers. I developed my fourth filter of detecting insider trading based on the Abnormal Turnover (AT). Apart from the four-filter approach, a day 0 AR hypothesis is also developed as a main contribution of this thesis. The day 0 abnormal return hypothesis suggests that on day 0, the day the merger is announced, there will be a substantial abnormal return for the targets due to the substantial trade volume in the stock market. But with the existence of insider dealing, the abnormal return may be partially absorbed prior to the announcement date and as a result, on day 0, the abnormal return will be expected to be lower than in the normal situation. In other words, the firms which are suspected of insider dealing activities may have a comparatively lower average abnormal return on day 0 than the firms which are not. In the conclusion we examine the implications for both corporate governance and also the regulatory regime. We do indeed find widespread evidence for insider trading and this is a matter of concern-After utilizing the three data samples of the U.K, the U.S and China, we can be fairly confident that relatively few of the clean firms will be anything other than clean. Not all of the suspected firms will be ‘guilty of insider trading’, but there is substantial reason to suppose that they should be examined in further detail to identify the nature of the trading which occurred.

Date of Award	31 Dec 2013
Original language	English
Awarding Institution	University of Bath
Supervisor	John Hudson (Supervisor)