There is often speculation, a rumor or even tip
shared, before many big mergers and acquisitions, word leaks out to select
investors who seek to covertly trade on the information. Stocks and options
move in unusual ways that aren't immediately clear.
Now, a groundbreaking new study finally puts what we've
instinctively thought into hard numbers — and the truth is worse than we
imagined.
A quarter of all public company deals may involve
some kind of insider trading, according to the study by two professors at the
Stern School of Business at New York University and one professor from McGill
University.
The study, perhaps the most detailed and exhaustive
of its kind, examined hundreds of transactions from 1996 through the end of
2012.
The professors examined stock option movements —
when an investor buys an option to acquire a stock in the future at a set price
— as a way of determining whether unusual activity took place in the 30 days
before a deal's announcement.
The results are persuasive and disturbing,
suggesting that law enforcement is woefully behind — or perhaps is so
overwhelmed that it simply looks for the most egregious examples of insider
trading, or for prominent targets who can attract headlines.
The professors are so confident in their findings of
pervasive insider trading that they determined statistically that the odds of
the trading "arising out of chance" were "about three in a
trillion." (It's easier, in other words, to hit the lottery.)
But, the professors conclude, the Securities and
Exchange Commission litigated only "about 4.7 percent of the 1,859
M.&A. deals included in our sample."
The S.E.C. and the Justice Department have publicly
made prosecuting insider trading a priority. Judging from the headlines about
traders at Steven A. Cohen's hedge fund or the hedge fund manager Raj Rajaratnam or
the investigation involving the activist investor Carl C. Icahn,
they do appear to be focused on it.
Yet if history is any guide, based on the results of
the study over 16 years, the government has a lot of catching up to do.
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