Corporate Governance in Banking

Corporate Governance in Banking

A Global Perspective

Edited by Benton E. Gup

Recent corporate scandals, together with the effects of globalization, have led to an increasing interest in corporate governance issues. Little attention has been paid, however, to international laws and recommendations dealing with corporate governance in banking from a global perspective. This impressive international set of expert contributors – academics, practitioners and regulators – remedies the lack of attention by examining the various issues and concerns of this important topic.

Chapter 5: Bank Mergers and Insider Trading

Tareque Nasser and Benton E. Gup

Subjects: business and management, corporate governance, economics and finance, corporate governance, financial economics and regulation, money and banking, law - academic, corporate law and governance, finance and banking law


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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