Working Paper: CEPR ID: DP6622
Authors: Viral V Acharya; Tim Johnson
Abstract: Recent takeover activity has been characterized by broader participation in acquiror financing on both debt and equity sides. We focus on private equity buyouts, and investigate whether the number of financing participants is related to the likelihood of insider trading prior to the bid announcement. Results suggest that more insiders leads to more insider trade. We study stock, option, bond, and CDS markets. Suspicious stock and options activity is associated with more equity participants, while suspicious activity in the credit markets is associated with more debt participants. The results highlight an important channel in the flow of information and may be consistent with models of limited competition among informed insiders. They are unlikely to be consistent with models of optimal regulation.
Keywords: Asymmetric Information; LBO; Private Equity; Regulation
JEL Codes: D82; G14; K42
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| increase in the number of insiders (G34) | higher likelihood of insider trading (G14) |
| larger syndicates (L14) | more information leakage (D89) |
| number of financing participants (G24) | suspicious trading activity (G14) |
| equity syndicate size (G24) | suspicious stock and options activity (G34) |
| debt syndicate size (F34) | suspicious trading in credit markets (E44) |