M&A operations: Further evidence of informed trading in the CDS market

Previous studies showed that private information gathered through banking services such as loans and syndicated debt is incorporated into CDS rates by large banks. Additionally, there is also evidence that innovations in CDS rates precede stock market returns prior to credit events. This paper adds to the literature by showing that the information obtained by major banks while providing M&A investment banking services is assimilated by CDS rates prior to the operation announcement. We also find strong supportive evidence that CDS innovations have incremental predictive power over stock returns before M&A announcements, and that this predictive power may be even greater when major dealers in the CDS market supplied investment banking services to one of the parts of the deal.