Informed trading in peers of M&A firms: Evidence from M&A advisor banks

• Main Author: LI, Xuanbo
• Format: text
• Language: English
• Published: Institutional Knowledge at Singapore Management University 2024
• Subjects: M&A; advisor bank; informed trading; peer firm; private information; Accounting
• Online Access: https://ink.library.smu.edu.sg/etd_coll/571; https://ink.library.smu.edu.sg/context/etd_coll/article/1569/viewcontent/GPAC_AY2024_PhD_Xuanbo_Li.pdf
• Institution: Singapore Management University

M&A advisor banks are privy to valuable and sensitive information through their service. I examine whether M&A advisor banks exploit such private information to trade in peers of M&A firms. I provide evidence that M&A advisor banks gain higher profits through their trading in peers of M&A firms, compared with non-advisor banks. Such informed trading is more intensive for M&A deals with larger impacts on peer firms (i.e., when the deal value is more significant for peer firms; when the M&A firms have larger market share in the industry; and when the stock price reactions of peer firms are stronger). Further analysis reveals that prior business relationships with peer firms enable M&A advisor banks to engage in such informed trading. In addition, M&A advisor banks’ performance pressure incentivizes them to utilize private M&A information for trading, while reputation concern deters such informed trading in peer firms.