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Director trading, or lack thereof, and acquiring firm performance Evidence from Australian mergers and acquisitions

Purpose - This paper aims to address the question of whether acquiring firm directors trading, prior to a merger or acquisition (M&A) announcement, predicts the share market reaction on M&A announcement. Design/methodology/approach - Event studies and cross-section regression were used in this analysis. Findings - This paper finds that acquiring firms with no director trading and firms with net director purchases in the 12 months prior to the M&A announcement earn positive abnormal returns. It is also found that share market reaction to M&A announcements is considerably larger for acquiring firms whose directors do not trade relative to those companies with directors who do trade over the prior 12 months. This director non-trading result is further born out in regression analysis. Research limitations/implications - The absence of pre-M&A announcement director trading could reflect lower agency costs for the acquiring firm and this might explain to stronger announcement day effect for this group of firms. Practical implications - The fact that directors choose not to trade in their shares prior to a M&A transaction appears to be viewed as good news by the market. Social implications - Director trading is value relevant for the acquiring firm and so it is critical that director trading is transparent. Originality/value - To the best of the authors' knowledge, this question has not been addressed in the literature before, particularly the finding for firms with no director trading in the period prior to the M&A announcement.