Informed Trading Reactions to New Private Information: Evidence from Nonpublic Merger Negotiations

Author:

Heitzman Shane1ORCID,Klasa Sandy2ORCID

Affiliation:

1. Marshall School of Business, University of Southern California, Los Angeles, California 90089;

2. Eller College of Management, University of Arizona, Tucson, Arizona 85721

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. This paper was accepted by David Simchi-Levi, finance.

Publisher

Institute for Operations Research and the Management Sciences (INFORMS)

Subject

Management Science and Operations Research,Strategy and Management

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