Regulating informed trading before merger bids in Canada
by Jeff Madura; Thanh Ngo
International Journal of Corporate Governance (IJCG), Vol. 5, No. 1/2, 2014

Abstract: We examine the impact of an amendment to Canadian law in 2004 which was intended to increase penalties on insider trading in Canada. We suggest that the effectiveness of the law can best be measured by its effect on the level of informed trading activity rather than the prosecution activity. We find that the mean information leakage of Canadian targets has declined significantly since the amendment, even after controlling for changes in the profile of announced bids. Thus, our results suggest that the level of illegal insider trading in Canada has declined since the amendment was implemented. We also find that the reduction in information leakage resulted in a lower premium offered by bidders for targets, which can encourage more merger activity. Thus, the amendment may not only allow for greater trust among investors and therefore liquidity in capital markets, but could also improve the market for corporate control.

Online publication date: Thu, 30-Apr-2015

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