The occurrence of insider trading in target shares of JSE listed companies prior to takeover announcements

Abstract

Research into whether insider trading exists in the shares traded on the Johannesburg Stock Exchange (“JSE”). The purpose of the research is to examine the share price in target companies and to determine whether or not it increases significantly during the days immediately preceding a takeover, delisting or share buy-back announcement. Out of a total of 5,039 merger and acquisition transactions, during the six- year period from 2000 to 2005, only 30 transactions met the criteria of information availability and non-occurrence of confounding events. The Average Cumulative Abnormal Returns (CAAR) of target companies during a 21-day event window period were examined. The examination of the CAAR was based on the historical bootstrapping technique and the CAAR was plotted on the frequency distribution to test for significance. The CAAR of the sample tested to be statistically significant in the days prior to the first public announcement. Evidence of a share price build-up in the days prior to the first public announcement was found. Controlling for confounding events, this price build-up could be indicative of insider trading. This research study seems to be the first study focused on insider trading and pre-announcement price run-ups on the Johannesburg Stock Exchange.