Informed trading around biotech M&As

Abstract

Purpose This paper aims to test the extent to which downward bias due to a floating-point exception in probability of informed trading (PIN) estimates obtained using the Easley, Hvidkjaer and O’Hara (EHO; 2002) method is remedied using the Yan and Zhang (YZ; 2012) method. The paper also aims to test the sample-size sensitivity of EHO PIN and identify PIN determinants for acquirers and targets in the biotech sector. Design/methodology/approach EHO and YZ PIN performances are compared for US biotech acquirers and targets around their mergers and acquisition (M&A) announcements. The sampling method of Kryzanowski and Lazrak (2007) is used to assess sample-size sensitivity of announcement window EHO PIN estimates. Cross-sectional regressions are estimated to identify PIN determinants. Findings EHO and YZ PIN are not significantly different. EHO PIN exhibits significant sample-size sensitivity. Information leakage prior to M&A announcements is strongly affected by some firm characteristics. Significant determinants of PIN behavior around M&A announcements include insider and institutional holdings and research and development (R&D) expense. Research limitations/implications Findings imply that PIN partially reflects the activities of insiders and other informed investors about takeover intentions. Subsequent research can examine PIN behavior around pre-announcement rumors for M&As in the same or other industries and for potential targets that are peers of the M&A targets. Originality/value This paper contributes to the ongoing debate in the empirical finance literature on whether PIN measures informed trading by examining its behavior and the importance of some methodological issues associated with its use in examining market behavior around M&A announcements.

Price formation in call auctions with insider information

“…This contradicts the theoretical result of Madhavan (1992). The present study is also related to the large literature devoted to estimating the probability of information-based trading in continuous markets (Easley et al , 1996; Duarte and Young, 2009; and Kryzanowski and Tran, 2018). The present study is the first to estimate the difference in valuation component and asymmetric information component in call auctions.…”

“…The present study is also related to the large literature devoted to estimating the probability of information-based trading in continuous markets (see, e.g., Easley, Kiefer, O'Hara, and Paperman, 1996;Duarte and Young, 2009;and Kryzanowski and Tran, 2018). The present study is the first to estimate the difference in valuation Finally, it should be noted that the insights of this study are not limited to stock markets.…”