Matt Levine's Money Stuff newsletter from a couple of days ago quoted a new paper from my friend and UCLAW colleague Fernan Restrepo:
Here are a fun paper and related blog post by Fernan Restrepo about “How the Misappropriation Theory Affects the Amount of Insider Trading”:
My paper tests this hypothesis by examining the impact of O’Haganon a common proxy for insider trading: target run-ups in mergers and acquisitions (“M&A”) – that is, the cumulative abnormal returns for the shares of the target company before the transaction is publicly announced. The intuition behind this proxy is that individuals who hold non-public information about mergers and acquisitions can make significant profits if they buy shares in the target company before the transaction is announced (since mergers typically involve the payment of a large premium over market prices); as a result, a significant increase in the target’s pre-merger price is likely indicative of a high incidence of trading on confidential information about the transaction. ...
The results show that the run-ups in fact decreased significantly in relation to the announcement returns after O’Hagan. Before O’Hagan, the average relative run-up was 7 percentage points lower than the announcement returns; after the decision, the difference became 9 percentage points. In this sense, after O’Hagan, there was less anticipatory trading explaining the overall valuation effect of M&A bids, which is consistent with the notion of less insider trading.
I suppose a thought experiment would be: If the US got rid of its current rules and replaced them with a simpler, “if you know about a merger that hasn’t been announced yet, it is illegal to trade the stock of the target”-style rule, would that change the average run-up? My guess is no: My guess is that the current hodgepodge of rules covers basically every practical situation, so expanding them wouldn’t have much effect.[4] But I’m not sure.
