Title: Regulating informed trading before merger bids in Canada

Authors: Jeff Madura; Thanh Ngo

Addresses: Department of Finance, Florida Atlantic University, Boca Raton, FL 33431, USA ' Department of Finance, College of Business, East Carolina University, 3rd Floor Bate Building, Mail Stop 503, Greenville, NC 27858, USA

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.

Keywords: corporate governance; insider trading; information leakage; mergers and acquisitions; M&A; regulation; merger bids; Canada; illegal trading; trust; liquidity; capital markets.

DOI: 10.1504/IJCG.2014.062344

International Journal of Corporate Governance, 2014 Vol.5 No.1/2, pp.22 - 42

Received: 28 Sep 2013
Accepted: 18 Feb 2014
Published online: 30 Apr 2015 *

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