Information leakages and the costs of merging in Europe

Abstract

Based on a comprehensive sample of European mergers over the 1997–2011 period, we find that information leakages experienced by target firms are conditioned on the investor protection characteristics in the target’s country. Specifically, information leakages are smaller for targets in European countries that experienced a greater improvement in rule of law and political stability. We also investigate whether and how bidders respond to information leakages experienced by targets that they are pursuing. We find no evidence that bidders reduce their bids of targets that experience abnormally large stock price run-ups. This implies that bidders incur a portion of the cost of informed trading that occurs before the merger bid is announced. Based on our results, it can be stated that regulatory actions that could reduce the level of informed trading in European countries may allow for a more active and efficient market for corporate control.

Keywords:

• information leakage
• European mergers
• cost of merging
• insider trading

JEL Classification:

• G18
• G15

Acknowledgement

We wish to thank Wm. R. McDaniel for his helpful suggestions.

Notes

¹ Available at http://info.worldbank.org/governance/wgi/index.asp.