The Relationship between Investment Horizons and Signals of Insider Trading in Takeover

Abstract Insider trading in target companies prior to mergers and acquisitions (M&A) can be regarded as an important information about the future profitability of the company. Suk and Wang (2021) find that net purchases by insiders in target companies are positively correlated with abnormal returns at the time of the M&A announcement, M&A synergy, bid premiums, and the probability of M&A completion. Fu et al. (2020) document that long-term investment horizon shareholders can impede insider trading because they can obstruct insiders from using their informational advantages through direct supervision. In this paper, we find that the positive impact of net insider purchases in target companies on abnormal returns at the time of the M&A announcement is stronger in companies with shorter shareholder investment horizons. However, there is no evidence to support that net insider purchases in target companies have a stronger positive impact on M&A synergy in companies with shorter shareholder investment horizons. Furthermore, there is no evidence to indicate that net insider purchases in target companies have an impact on bid premiums, nor that this impact is stronger in companies with shorter shareholder investment horizons. Moreover, we find that the positive impact of net insider purchases in target companies on the probability of M&A completion is stronger in companies with shorter shareholder investment horizons. JEL classification numbers: G11, G14, G34. Keywords: Insider trading, Shareholder investment horizon, Insider investment horizon, Acquisition.