Insider Trading and the Market Abuse Directive: Are Voluntary and Mandatory Takeover Bids Different?

Abstract

This study analyzes the effectiveness of the Market Abuse Directive (MAD) in reducing possible profits from insider trading during takeover bids. Exploiting the quasi-experimental setting provided by the introduction of the MAD, our event-study analysis on the Italian market suggests that the new regulation did produce effects, for mandatory offers, on the magnitude of abnormal returns and volumes noted before their announcement. Instead, we find no effect for voluntary offers, which prove to be intrinsically different from the latter ones. Multivariate econometric analyses based on regression and matching methods confirm this result. We interpret our results in light of the choice problem of the optimal amount of insider trading, based on the comparison of marginal costs and benefits of the illegal activity, after considering the differences between voluntary and mandatory offers.

The impact of the Market Abuse Directive on illegal insider trading: evidence from three Southern European stock markets

“…And again, the lack of statistical significance of the variable of interest MAD indicates that there is no evidence that target run-ups are lower after the implementation of a more restrictive insider trading regulation. This latter result corroborates the evidence presented by Ferretti et al (2019) for the Italian stock market.…”

“…Our findings are of interest to policymakers and financial regulators. In fact, in the context of the theoretical model proposed by Ferretti et al (2019), it is plausible to admit that Impact of the Market Abuse Directive the main reason for the ineffectiveness of the MAD lies in enforcement problems. Given that insiders are hard to detect in the real world, it is likely that the marginal cost of being caught is not high enough to compensate for the expected marginal benefits of engaging in such illegal activity.…”

“…One of the most innovative elements of the MAD is the introduction of administrative penalties in addition to the criminal penalties already in place to prevent and fight market Impact of the Market Abuse Directive abuse (Ferretti et al, 2019). The new market abuse regime introduced by the Directive contains four key features, the first of which refers to disclosure rules.…”

“…Nevertheless, throughout this work, we will assume that unusually high cumulative abnormal returns (CARs) ahead of an M&A announcement can Impact of the Market Abuse Directive be used as a proxy for illegal insider trading activities, even though significant abnormal returns alone hardly serve as sufficient proof of insider trading. This is the perspective adopted by similar studies that use abnormal price movements, measured through CARs, to examine changes in the effectiveness of insider trading regulations (Ferretti et al, 2019;Li and Wu, 2019;Dutordoir et al, 2021;Pham and Ausloos, 2022).…”

Market abuse under different close price determination mechanisms: A European case

“…Market abuse refers to insider trading and stock market manipulation, both of which rely upon information asymmetries between contracted parties. The former refers to trading on the use of information that is only available to the insider, which can lead to abnormal profits at the expense of the less informed market participants (e.g., front running) see Bhattacharya et al, (2014), Cumming et al, (2020), Ferretti et al, (2019), Mao et al, (2019) and references therein. The latter is an umbrella term that encompasses advancing the bid, improperly matched orders, layering, momentum ignition, painting the tape, quote stuffing, spoofing, trash and cash, wash trades to name but a few (EU, 2014(EU, , 2015Lee et al, 2013).…”