Abstract
In complete market, the information is symmetry. But in the real world, the information is usually asymmetric. M&A is a good example of information asymmetry. After M&A is announced, stock price of the target company usually increases significantly. If the investors acquire private information before the M&A announcement date, they can profit from the private information. The M&A arbitrage hedge fund implements the trading strategy of buying the potential target company and at the same time selling the acquiring firms prior to the M&A announcement date. Meulborek (1992) analyzes that the illegal inside trading cases in America are most M&A. Easley, Hvidkjaer, and O’Hara (2002) have established stock market microstructure model to infer the probability of information-based trading (PIN) from transaction and quote data. We employ Lee and Ready (1991) to distinguish between buy-order-driven transactions and sale-order-driven transactions. The paper applies the microstructure model established by Easley, Hvidkjaer, and O’Hara (2002) to infer the probability of information-based trading before the announcement of M&A. The purpose of this paper is we aim to investigate whether there are, if any, information-based trading prior to the announcement of M&A.