An analysis of intraday market behaviour before takeover announcements

The objective of this study was to analyse the changes in the intraday market microstructure behaviour before a takeover announcement for a sample of target, bidder and control (non-target) companies. Under the hypothesis that agents with asymmetric information were operating in the market, the Autoregressive Conditional Duration (ACD) model was used to estimate the joint impact of duration and microstructure variables on the returns volatility in the months before the event. The analysis was conducted on tick-by-tick data over a period of six to four months, and then three months before an announcement date. Our results suggested that the effect of information on the returns volatility, as measured by several economic and intraday microstructure observable variables, was different between target, bidder and non-target companies leading up to the takeover announcement. These variables were durations between trades, the surprise in durations, spreads and trading volumes. It was concluded that the intraday trading behaviour for takeover targets was affected by traders who held private information (especially the bidders) at least three months before the official announcement of the offer. The selected stocks were traded on the Australian Stock Exchange (ASX) and were sourced between 2004 and 2008 from a wide range of industries and with different levels of liquidity.