The Informativeness of Substantial Shareholder Trading in the Lead up to a Takeover Bid

Although substantial shareholders are often considered quasi-insiders, not much is known about the information they possess, especially around changes in corporate control events. We examine whether substantial shareholders in target firms possess information about future takeover activity and if they have such information, whether they trade opportunistically on it. The results show increased purchases by substantial shareholders close to a takeover announcement where these trades predict the likelihood of takeovers. However, they do not predict bid premiums nor other deal characteristics. A comparison of different types of substantial shareholders indicates that institutional shareholder trades are better indicators of takeover likelihood relative to the trades of managerial shareholders. These findings imply that substantial shareholders are indeed quasi insiders who have an informational advantage over other shareholders about future takeover activity and they use this advantage for their own benefit.