Publication: Deregularization, insider trading and tender offers
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2002-06
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SSRN
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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.
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Keywords
Deregulation, Event studies, Industry restructuring, Insider trading, Mergers and acquisitions, Tender offers
Bibliographic citation
SSRN working paper series, jun. 2002