How directors trade and learn during takeovers
A change in corporate control such as a takeover represents a significant event in the life of a firm, having short and long-term implications on firm value and shareholder wealth. Corporate insiders such as target and acquirer directors have knowledge of, and influence over imminent bids because they participate in takeover negotiations. Such foreknowledge of takeovers and involvement in the negotiations create a potential conflict of interest where these directors have opportunities to increase personal wealth or to further their careers and reputation. Agrawal and Nasser (2012) show such behaviour in U.S firms where target directors increase their net purchases in the lead up to takeover announcements. On the other hand, target director trading can signal to investors the information on takeover type and terms, because their trading is connected to the realised takeover premium. As previous studies indicate differences in realised premium based on deal characteristics,1 it is plausible that target directors modify their trading decisions based on the foreknowledge acquired about these deal characteristics. Acquiring directors have also been shown engaging in informed trading around takeover announcements with small increases in purchases and decreases in sales (Seyhun, 1990). More recently, Shams et al. (2016) report opportunistic trading by Australian acquiring directors where preannouncement trading value is positively associated with abnormal return at announcement. Although insiders have information advantage over outside investors, in some cases, the information is insufficient or the market may disagree with management's decision to engage in takeovers. In these cases, learning or acquiring additional information occurs during the takeover process. Luo (2005) and Kau et al. (2008) demonstrate acquirer learning from the market where the market reaction to a takeover announcement predicts the likely outcome of the deal.