Abnormal Stock Behavior Prior to Public Takeover Offers and the Implications for Future Informed Trading Enforcement: An Investigation of the Danish Market

Abstrakt

The purpose of this thesis is threefold. First, it serves the purpose of providing evidence for illegal insider trading prior to public company takeovers in the Danish stock market. Second, it serves the purpose of identifying event characteristics which make the occurrence of illegal insider trading more likely. Third, it serves the purpose of presenting the implications of the findings through potential options of improvement in relation to the Danish FSA’s enforcement processes. In doing this, an event study method is applied as a cornerstone for the findings. More specifically, a pre-event stock run-up analysis is applied, which focuses on stock price and trading volume during the event window. From a theoretical standpoint, this empirical method requires that the selected data is controlled for noise creating elements, which could imitate illegal insider trading altogether. A vast amount of empirical literature has listed several stock influencing elements based on corporate finance theory, which should be removed from the results in order to encapsulate the desired effect of interest – illegal insider trading. The majority of this literature, which in every case is concerned with geographies different from the Danish, has found evidence of illegal insider trading prior to listed company takeovers. Thus, the contribution of this thesis is essentially the evidence and the in-depth insights it delivers with respect to a specific geographical area. Our results are in line with what was already found in previous studies for other geographies, that illegal insider trading is also a general issue in the Danish stock market rather than an exception to the norm. In addressing the second and third purposes, this thesis also investigates cross-sectional regression relationships among stock price runup and several event specific characteristics. The results of this thesis discover several statistical relationships between illegal insider trading and specific event related characteristics. These discoveries together with the theory and previous studies constitute a guideline as to where the Danish FSA potentially could improve their illegal insider trading enforcement efforts going forward.