Impact of the Galleon Case on Informed Trading Before Merger Announcements

Abstract

On October 16, 2009, the U.S. government charged Galleon hedge fund founder Raj Rajaratnam and five others with insider trading, in what was described by a key prosecutor overseeing the case as a "wake-up call to Wall Street and to every hedge fund manager." We find that the mean abnormal stock price runup of targets (a measure of informed trading) during the 26 months since the inception of the Galleon case declined from 5.12% to 2.84%. The early evidence strongly suggests that the Galleon case has sent a clear signal to the traders, and that the traders are listening.

The information content of managerial insider trading: evidence from analyst forecasts

“…Consistent with the documented findings by Chira and Madura (2013), the insider-trading effect diminishes following the diffusion of the Galleon insider-trading case [8]. To our knowledge, ours is the first paper providing evidence of how managerial insider trading plays an important role in the earnings forecast estimation.…”

“…The effectiveness of this regulation is questionable as researchers still find strong evidence of insider-trading activities after the passage of Reg FD (i.e. Chira and Madura, 2013; Berkman et al , 2013; Kraft et al , 2014, among others). However, there may be a shift in the information content of insider disclosures from SEC Forms 4 and 5 as Brochet (2010) finds that the decrease in information dissemination from insiders to select groups (such as financial analysts and institutional investors) after the passage of Reg FD increases the information value of SEC insider disclosures.…”

“…Due to its magnitude and media coverage, the Galleon insider-trading case is one of the largest hedge fund insider-trading cases ever charged by the US Government (Chira and Madura, 2013). We suspect that the “wake-up call” delivered by the Galleon case has discouraged illegal insider trades, reducing information asymmetry, and therefore reducing the effect of insider-trading on analysts' forecast accuracy, dispersion, and bias.…”

Impact of Regulatory Enforcement on Leakages Prior to Analyst Recommendations

“…It also stated SEC's intention to pursue criminal penalties, which may serve as a stronger deterrent to market participants who could either access or spread inside information. Chira and Madura () find that information leakage prior to merger announcements has been reduced since the inception of the Galleon case, whereas Agapova and Madura () find that information leakage prior to managerial guidance has been reduced since the inception of the Galleon case.…”

“…Chira and Madura (2013) acknowledge that the reduction in the stock price run-up prior to merger announcements following the Galleon case might be partially caused by the stronger penalties imposed by the Dodd-Frank Act on white collar crime.…”