Deregularization, insider trading and tender offers

Abstract

This paper examines insider trading operations and the transmission of information to markets, during the merger and firm acquisition process, that followed the deregulation and restructuring of the Spanish electrical sector, who began in 1993 and is still under way in many countries of the European Union (Green Paper, 2001). In particular, we will study the events surrounding the 1996 acquisition of FECSA and Sevillana de Electricidad, two of the Spanish biggest electricity suppliers and distributors, by ENDESA, a formerly state owned company and the nation’s largest power supplier We use public trading records around the announcement date of the event to track abnormal returns, market volumes and spreads and to isolate individual transaction records by broker, from the flow of background trading, permitting the analysis of the market ’s reaction to the onset of informed trading. Because the insider information was not revealed to other market participants until the event, and even rumors of the acquisition were publicly and officially denied, this case presents a unique laboratory for studying the dissemination and incorporation of private inside information into market prices. Unlike earlier studies that make use of daily transactions and concentrates on how informed trading affects stock prices, this paper also analyzes individual insider purchases within the trading day. We examine excess returns on the days of illegal insider trading and how this trading is conducted in terms of average trade volume, frequency of transactions, average spread and brokerage firm. The findings reported in the paper shed some light in the process by which the market incorporates and infers information from insider trading in a case of industry restructuring. The relationship between insiders’ purchases can be documented on a day-by-day basis, by trade, firm and broker, but we can’t go beyond that information (i.e., naming the insiders) except in the few cases where a preliminary penalty file was opened and concluded, by the CNMV. Nevertheless, our results have a number of implications for models of market microstructure, as the reaction of prices to insider operations prior to the announcement day, the way insiders operate on average, with large and frequent limit and market orders and quick sales after the run-ups.