Information content of directors' trading around acquisitions

• Acquiring directors' trading and returns around takeover announcements
• Pre-announcement trading value of acquirers' directors is positively related to announcement-period abnormal returns.
• Corporate governance plays a significant role in directors' trading pattern prior to acquisition announcement.

This paper investigates the patterns of directors' trades and returns around takeover announcements. We find that the pre-announcement net value (the difference between buy value and sell value) of directors' trading is positively related to acquirers' announcement period abnormal returns. This relation is stronger for private target acquisitions and for stock-financed acquisitions, when the information asymmetry between directors and outside investors is more pronounced. However, this relation does not hold for better governed and highly monitored acquirers. Our findings indicate opportunistic trading by directors prior to takeovers and highlight a significant role that corporate governance mechanism plays in restraining these opportunistic behaviors.