Executive compensation and informed trading in acquiring firms around merger announcements |
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| Institution: | 1. WHU – Otto Beisheim School of Management, Burgplatz 2, 56179 Vallendar, Germany;2. Concordia University, John Molson School of Business Building, 1450 Guy, Montreal, Quebec H3H 0A1, Canada;1. The Wang Yanan Institute for Studies in Economics, Xiamen University, Fujian 361005, China;2. Department of Economics, Cornell University, Ithaca, NY 14853, USA;1. Department of Economics, University of Sheffield, 9 Mappin Street, Sheffield S1 4DT, United Kingdom;2. Department of Quantitative Methods and Information Systems, Indian Institute of Management, Bangalore, India;1. International Monetary Fund, United States;2. DRM-Finance, Université Paris Dauphine, PSL Research University, Place du Maréchal de Lattre de Tassigny, 75016 Paris, France;1. DSB 302, McMaster University, Hamilton, ON L8S 4M4, Canada;2. DSB A210, McMaster University, Hamilton, ON L8S 4M4, Canada;1. Banque de France, France;2. European Central Bank, Germany |
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| Abstract: | This paper analyzes informed trading in acquiring firms through (stock) merger announcements. We show that pre-announcement abnormal option volumes in acquiring firms strongly increase ahead of a stock merger (by approximately 300%). Furthermore, we show that the direction of option trades (puts or calls) prior to an announcement can predict post-announcement stock returns. Our results also indicate that higher wealth-to-performance sensitivities of top executives are related to higher abnormal put than call option trading before stock merger announcements. Overall, our results support the view that top executives have a hedging motive. They tend to purchase protection against, e.g., confounding (negative) information policies and/or empire-building mergers with negative NPVs, in order to avoid short-term salary losses (lower bonuses, lower stock options, etc.). |
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| Keywords: | Compensation Informed Trading M&A Option implied information Wealth-to-performance sensitivity |
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