What Causes the Target Stock Price Run-Up Prior to M&A Announcements?

Abstract

We investigate the target stock price run-up prior to M&A announcements between 1981 and 2011. About one third of the total price run-up occurs before announcements, and the pre-announcement run-up does not seem to be caused by market anticipation of M&As, toehold acquisitions or reported insider trading. Instead, the pre-announcement run-up is significantly larger when media attention on insider trading is lower, when institutional ownership is lower, and when probability of informed trading is higher. The findings are consistent with the view that the target stock price run-up prior to M&A announcements is caused by unreported insider trading.