Hedge funds in M&A deals: Is there exploitation of insider information?

This paper investigates trading patterns in target and acquirer firms prior to public announcement of M&A deals, a corporate event in which group based co-offence has been anecdotally documented. Our analysis differentiates whether such trading is primarily conducted by hedge funds with short-term investment horizons as opposed to other short horizon investors or hedge funds and institutional investors with long-term horizons, in both the equity and derivatives markets. Our results are consistent with exploitation of M&A deal related information prior to the deal's public announcement. In particular we find that the greater the likelihood of insider information leakage, the greater the short-term hedge fund holdings. We consider several alternative explanations, such as those related to the short-term hedge fund's skill in identifying profitable trades' ex-ante; our results seem inconsistent with such alternative explanations.