Sources of target stock price run-up prior to acquisitions

Dividend Policy and Stock Acquisition Announcement Returns: A Test of Asymmetric Information Theory

“…The average target run‐up is large (0.12), even though the only form of payment to target shareholders is stock (Schwert ). Brigida and Madura () assert that target firms with higher levels of asymmetric information should experience more pronounced run‐up.…”

Impact of the Galleon Case on Informed Trading Before Merger Announcements

“…We also include five bidder variables that could influence the abnormal stock price runup of the target: a dummy variable (HOSTILE) representing hostile bidders, which may more effectively keep their plans hidden about their pursuit of the target; a dummy variable (PE) representing private equity bidders, which have an incentive to pursue targets without leaking the information (see Brigida and Madura ); a dummy variable (BORROW) indicating if the bidder borrows funds to finance the acquisitions, which spreads information to more intermediaries and could cause an information leakage (see Acharya and Johnson ); (4) a dummy variable (MULTBID) representing the existence of multiple bidders for the target, which may result in more information leakages (see Acharya and Johnson 2010); and (5) a dummy variable (TOEHOLD), which indicates targets for which bidders held at least 5% of the shares of the target before the announcement date and therefore might be more likely candidates for a takeover. In addition to the characteristics of the target or bidder, we also include a control variable (ACTIVITY) to represent merger activity in a particular quarter, since higher activity could cause more information leakages before mergers.…”

“…Studies by Bhattacharya and Daouk () and Jayaraman (2012) confirm that the enforcement of insider trading in various countries can encourage more investor or analyst participation and liquidity in financial markets. Brigida and Madura () find that the mean information leakage (as measured by the target's abnormal stock price runup) before announced acquisitions in the United States declined following the implementation of the Sarbanes–Oxley Act. They explain that this act made executives more accountable in disclosing information and could have indirectly deterred insiders from engaging in illegal trading or sharing inside information because of fears that they would be held accountable.…”

“…We also recognize that the Sarbanes–Oxley Act could have reduced the abnormal stock price runup of target firms (see Brigida and Madura ). However, we do not include it in our analysis because our entire sample period is after the implementation of that act.…”

Testing the mixture of distributions hypothesis on target stocks

“…The post-announcement period begins at close of business on the day of the announcement, and runs until the formal conclusion of the bid. When calculating summary statistics, the pre-announcement period excludes the contaminating effects of the 'run-up' period of 20 days during which target stock prices tend to rise prior to the publication of the bid (see inter alia Schwert, 1996;Brigida and Madura, 2012).…”