Executive compensation and informed trading in acquiring firms around merger announcements

Umut Ordu and Denis Schweizer

Journal of Banking & Finance, 2015, vol. 55, issue C, 260-280

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.).

Keywords: Compensation; Informed Trading; M&A; Option implied information; Wealth-to-performance sensitivity (search for similar items in EconPapers)
JEL-codes: D03 G14 G34 J3 (search for similar items in EconPapers)
Date: 2015
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Citations: View citations in EconPapers (5)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jbfina:v:55:y:2015:i:c:p:260-280

DOI: 10.1016/j.jbankfin.2015.02.013

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