Get access

DO INSIDERS PRACTICE WHAT THEY PREACH? INFORMED OPTION EXERCISES AROUND MERGERS AND ACQUISITIONS

Authors


  • We are very grateful to our referee, Jie Cai, for his insightful feedback through the review process. We also thank seminar participants at the University of Connecticut, the University of Kentucky, Mississippi State University, West Virginia University, Georgia State University, the 2009 ISCTE Business School (IBS) Mergers and Acquisitions Conference, 2009 Eastern Finance Association, 2008 Financial Management Association, and the 2008 Southern Finance Association meetings for useful comments and suggestions. We also appreciate the comments of Leonce Bargeron, Ivan Brick, Don Chance, Qinglei Dai, Kristine Hankins, Ann Marie Hibbert, Michael Highfield, Brad Jordan, Jayant Kale, Alexander Kurov, Greg Nagel, Ken Roskelley, Harvey Ryan, Costanza Meneghetti, Omesh Kini, Jason Smith, Katsiaryna Salavei, Mike Stegemoller, Ninon Sutton, and Adam Yore.

Abstract

We examine executive stock option exercises around a sample of merger and acquisition announcements between 1996 and 2006, focusing on a subset we identify as potentially informed. For stock-financed acquisitions, we find a surge in informed exercises by acquirer insiders in the year leading up to the acquisition announcement, but target insiders display no similar increase. We find the market reaction upon the announcement for acquirers is negatively related to extreme early exercises and find some evidence of long-run underperformance. Overall, our evidence indicates that insiders knowingly bid for firms when they personally believe their own firm is overvalued.

Ancillary