Informed trading around biotech M&As
Abstract
Purpose
This paper aims to test the extent to which downward bias due to a floating-point exception in probability of informed trading (PIN) estimates obtained using the Easley, Hvidkjaer and O’Hara (EHO; 2002) method is remedied using the Yan and Zhang (YZ; 2012) method. The paper also aims to test the sample-size sensitivity of EHO PIN and identify PIN determinants for acquirers and targets in the biotech sector.
Design/methodology/approach
EHO and YZ PIN performances are compared for US biotech acquirers and targets around their mergers and acquisition (M&A) announcements. The sampling method of Kryzanowski and Lazrak (2007) is used to assess sample-size sensitivity of announcement window EHO PIN estimates. Cross-sectional regressions are estimated to identify PIN determinants.
Findings
EHO and YZ PIN are not significantly different. EHO PIN exhibits significant sample-size sensitivity. Information leakage prior to M&A announcements is strongly affected by some firm characteristics. Significant determinants of PIN behavior around M&A announcements include insider and institutional holdings and research and development (R&D) expense.
Research limitations/implications
Findings imply that PIN partially reflects the activities of insiders and other informed investors about takeover intentions. Subsequent research can examine PIN behavior around pre-announcement rumors for M&As in the same or other industries and for potential targets that are peers of the M&A targets.
Originality/value
This paper contributes to the ongoing debate in the empirical finance literature on whether PIN measures informed trading by examining its behavior and the importance of some methodological issues associated with its use in examining market behavior around M&A announcements.
Keywords
Acknowledgements
Kryzanowski gratefully acknowledges financial support from the Senior Concordia University Research Chair in Finance. The authors would like to thank Osman Ulas Aktas and Rahul Ravi for their helpful comments. The usual disclaimer applies.
Citation
Kryzanowski, L. and Tran, T.P. (2018), "Informed trading around biotech M&As", Studies in Economics and Finance, Vol. 35 No. 1, pp. 44-64. https://doi.org/10.1108/SEF-10-2016-0257
Publisher
:Emerald Publishing Limited
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