Tareque Nasser and Benton E. Gup INTRODUCTION Recently, the Australian Securities and Investment Commission (ASIC) accused Citigroup of trading on its knowledge of a client’s takeover bid. If found guilty, Citigroup will be subject to ﬁnes approaching $715 million.1 This example demonstrates how regulators around the world are enforcing securities and investment laws in the wake of the notorious Enron and WorldCom debacles in the US. Ensuring that ﬁnancial institutions and their managers comply with securities and investment laws is crucial for maintaining a sound ﬁnancial system. Furthermore, violations of investor protection laws indicate bad corporate governance, which can increase an institution’s cost of capital. This chapter examines whether insiders at target banks use private information to trade their ﬁrms’ shares before merger announcements. Informed trading around merger and acquisitions events has received much attention in the ﬁnance literature because a target ﬁrm’s abnormal return is almost always signiﬁcantly positive following a merger announcement. (See Schwert, 1996; Andrade et al., 2001.) Madison et al. (2004) examined insider trading of target banks prior to their merger announcements during the period 1991–7. However, our sample, methodology, and time period diﬀer from Madison et al. (2004). We examined insider trading data prior to bank merger announcements from 1 January 1995 to 31 December 2005. We exclude unsuccessful mergers and mergers with target price below $100 million. Our study is important for two reasons. First, our sample period is marked by several regulatory changes that increased the merger activity in the...
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