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Fear and media coverage: The case of insider trading in takeover targets
Mark Aleksanyan
Lecturer in Finance
University of Glasgow
Jo Danbolt
Professor in Finance
University of Edinburgh
Antonios Siganos
Senior Lecturer in Finance
University of Glasgow
Betty (HT) Wu
Lecturer in Finance
University of Glasgow
Abstract
We examine whether target corporate insiders are deterred from open market share purchases
in their own firms prior to merger announcements following news in the Wall Street Journal
referring to illegal trading in past mergers. We posit that the deterrence effect provoked by
these news articles results from enhanced perception of the litigation and reputation risks. We
find evidence of a significant negative effect of such articles on insider purchases. This effect
increases with the visibility and severity of the articles. We find the effect to be smaller when
trading is highly profitable, but to be greater when public enforcement is relatively weak.
Overall, our study shows a significant short-term negative relation between media deterrence
and profitable active trading by target insiders.
Keywords: Insider Trading; Deterrence; Media Coverage; Risk Perception; Takeover Targets
2
“One of the most effective brakes on crime is not the harshness of its punishment, but the
unerringness of punishment… The certainty of even a mild punishment will make a bigger
impression than the fear of a more awful one which is united to a hope of not being punished
at all.”
Cesare Beccaria (On Crimes and Punishments, 1764)
1. Introduction
This study examines whether target corporate insiders refrain from purchasing shares
of their own firms during the lead-up to the public announcement of a bid for the firm after
media coverage of news about illegal insider trading in past mergers. We posit that such media
news coverage may temporarily increase the insiders’ fear and anxiety of the litigation and
reputation risks associated with transacting in their own firm’s shares, resulting in a short-term
negative impact on their purchases. Fear and anxiety have been shown to reduce investors’
willingness to take risks by making them more pessimistic about future returns (e.g., Kaplanski
and Levy, 2010). Prior research in psychology finds that individuals tend to assess risk or
estimate probabilities by using heuristics (i.e., mental shortcuts), rather than all available
information. One such heuristic is to infer the frequency of an event from its availability, i.e.,
the ease with which concrete occurrences of the event come to mind (Tversky and Kahneman,
1973, 1974), which might be affected by the salience of the event that is specific to the local
context where the risk is estimated (Bordalo et al., 2012, 2013). Contextual factors such as
emotional affect, novelty, time proximity, or media coverage increase the salience of an event
(Dessaint and Matray, 2017).
Insider trading in takeover targets provides an ideal setting to study the effect of media
coverage on individuals’ perceived risk from wrongdoing. The trades that we study are
transactions reported to the U.S. Securities and Exchange Commission (SEC) by registered
corporate insiders. These trades are not illegal, unless they are based on private information.
However, Agrawal and Nasser (2012), argue that a substantial percentage of such trades are
opportunistic and based on material, non-public information. In addition, Cohen et al. (2012)
find that opportunistic insider trades are a significant predictor of SEC investigations and that
opportunistic trading decreases significantly following SEC insider trading enforcement,
consistent with the idea that opportunistic traders dampen their trading activity when the
potential costs of illegal trading increase. Collectively, these studies provide evidence that
insider trading tends to be informative and profitable, and insiders have knowledge of the
3
litigation risk as well as potentially more severe reputation damages from their transactions.1
We focus on trading by insiders in takeover targets because being acquired is a major event for
target firms. This might provide a tempting trading opportunity for corporate insiders who are
often aware of takeover negotiations prior to the announcement.2 Studies such as Agrawal and
Nasser (2012) and Agrawal and Cooper (2015) find that target corporate insiders reduce their
purchases while increasing their net purchases by reducing sales, again suggesting that they are
aware of the forthcoming mergers and the risks entailed.
We hypothesise that the publication of news articles referring to illegal insider trading
around past mergers will have a significant short-term negative impact on the level of share
purchase activity by target company insiders in the lead up to the public bid announcement for
their firms. While the articles, which we will refer to interchangeably as “fear” or “deterrence”
articles, relate to illegal trading in past mergers rather than to the forthcoming bids or to the
insiders we study themselves, we posit hat such articles may raise the level of fear of insiders
from trading based on their inside information, and therefore deter them from trading in the
run-up to merger announcements.
Our hypothesis is motivated by the Classic Deterrence Theory (CDT) from the field of
criminology. This theory maintains that humans decide whether to undertake an illegal activity
based on expected pleasure and pain (Zimring and Hawkins, 1973; Andenaes, 1974). It predicts
that the fear of sanctions or punishment would deter rational actors from engaging in a
potentially illegal activity (Paternoster, 2010). As the quote at the beginning suggests, to
prevent wrongdoing, it would be more effective to increase the likelihood than the harshness
of its punishment. Indeed, Cohen et al. (2012) find that opportunistic traders reduce trading
following waves of SEC insider trading enforcement, and Del Guercio et al. (2017) report that
aggressive SEC enforcement deters illegal insider trading activity. In a similar vein, we argue
that media coverage can achieve that by altering some insiders’ perceived risk – but not
necessarily the real risk – of being caught or investigated by the SEC. Exposure to news of past
1 The SEC issued on average around 40 insider trading related enforcement actions per year during 2005-2015.
Approximately a third of the defendants in these actions were top corporate insiders, current or former board
directors or executive officer (Anand et al., 2018). The consequences to insiders of getting caught or even simply
being investigated by the SEC may vary from losing their jobs and potential loss of reputational capital, to civil
and criminal penalties under insider trading laws (see e.g., Agrawal and Nasser (2012) for a discussion). 2 A number of studies (e.g., Jarrell and Poulsen, 1989; Pound and Zeckhauser, 1990; Morgenson, 2006; King,
2009) show that stock returns of target firms usually increase significantly, from as early as 30 days prior to
merger announcements. Thus, corporate insiders, if aware of forthcoming bids for their firms, could make
substantial gains from buying shares of their own firms during the stock price run-up period.
4
insider trading violations3 will remind insiders of the risks4 and may affect their fear of being
caught. If so, their subjective probability of litigation and/or reputation risk can be expected to
rise temporarily. Prior literature on media coverage has examined the role and impact of media
on market sentiment (e.g. Tetlock, 2007; Fang and Peress, 2009), investor attention (e.g.,
Barber and Odean, 2008), corporate governance (Liu et al., 2017), and information
dissemination (e.g., Dai et al., 2015; Rogers et al., 2016). We contribute to this literature by
documenting the influence of media, as a risk perception channel, on target corporate insiders’
trading behavior.
Our main finding is that these news articles have a significant negative effect on insider
purchases. This relation remains robust in various tests. We find that the negative effect is
weaker when trading is highly profitable (when the temptation to trade, despite the risk, would
be higher), but to be stronger in times of weak public enforcement of insider trading
regulations. These results are consistent with our Classic Deterrence Theory-based cost-benefit
trade-off hypothesis.
Furthermore, this negative relation increases with the visibility and severity of the
articles, in line with salience theories of choice. These effects are temporary and seem to
disappear in a couple of weeks, which is consistent with our premise that insiders’ response is
not entirely rational in nature, but rather is triggered by elevated anxiety and perception of risk.
However, we do not find a reversal effect which is typically seen in behavioral finance studies
suggesting that it may take longer for some insiders to completely ‘forget’ their anxiety, if they
are exposed to more salient news for example. Overall, our study shows the significance of
media deterrence on profitable active trading by target insiders through the risk perception
channel.
Two papers that similarly explore the significance of the media on corporate insiders’
transactions (i.e., the information dissemination channel), are Rogers et al. (2016) and Dai et
al. (2015). Rogers et al. (2016) find that when media covers filings of insiders’ trades, stock
returns adjust rapidly to their dealings, indicating that the impact of insider transactions are
more apparent in the market when covered by the media. Closer to our study, Dai et al. (2015)
3 Tetlock (2011) finds evidence that individual investors overreact to stale information, leading to temporary
movements in firms’ stock prices. In a similar vein, while the news in fear articles relates to insider trading
violations in past mergers, we posit that they will affect current behavior of insiders. 4 The availability heuristic derives from the experience that frequent events are much easier to recall or imagine
than infrequent ones. Consequently, when assessing the probability of an event, most people evaluate how easy it
is to imagine an example of a situation in which this event actually occurred.
5
find that when media covers past transactions by corporate insiders, corporate insiders on
average reduce the level of strategic timing of their later transactions, with the profitability of
their trades after the initial media coverage significantly lower. In contrast to Dai et al. (2015),
in our study, the media coverage is not directly linked to insiders themselves, but concerns
illegal insider trading by others in past mergers. The initial source of information for the article
may vary significantly, coming e.g., from the SEC, court cases, firms under investigation,
rumors, or simply based on the interest of the Wall Street Journal to cover a relevant topic over
time. This may raise questions as to whether the relation we observe is a result of the
publication per se, or whether deterrence articles might forebode greater enforcement in the
future. We do not find that these news articles foretell subsequent increases in the number of
enforcement actions, even though this is likely what insiders believe when they re-assess the
risk-return trade-offs of trading after the publication of the articles. If anything, insider trades
seem to respond to SEC investigations more than prosecuted cases,5 indicating the reputation
risk to be an important factor in the potential costs of illegal insider trading. To our knowledge,
this paper is the first to show that the media has a deterrence effect on profitable active trading
by target corporate insiders, especially when formal enforcement is not strong.
The remainder of the paper is structured as follows. Section 2 reviews relevant
literature. Section 3 discusses the data and methodology used. Section 4 reports the empirical
results of this study, and the final section concludes this study.
2. Relevant literature and theory
Our hypothesis builds upon three premises: (1) that registered insiders have to report
their stock trades to the SEC and they are aware that these trades may come under SEC’s
scrutiny; (2) the premise of the Classic Deterrence Theory, that a rational individual would be
deterred from engaging in a potentially incriminatory activity when the perceived risk or
severity of potential punishment outweighs the reward; and (3) the finding from the field of
investor psychology that media attention to negative events may provoke investors’ anxiety
and fear, and temporarily reduces their willingness to take risks (e.g., Kaplanski and Levy,
2010). Below we explicate how these premises constitute necessary and sufficient conditions
for our conjectured effect.
5 This result is consistent with the findings in Del Guercio et al. (2017).
6
2.1 Are corporate insiders’ transactions opportunistic?
The first premise for our hypothesis is that that registered insiders have to report their
stock trades to the SEC and they are aware that these trades may come under SEC’s scrutiny.
Section 16a of the Securities Exchange Act of 1934 requires registered corporate insiders to
provide public disclosure about their stock trading to the SEC. Their trading would be deemed
illegal (and prohibited under SEC Rule 10b-5) if it is based on material non-public information.
It is the SEC’s remit to scrutinize the registered insiders’ transactions and to prove an illegal
activity for a prosecution to take place. Events such as merger announcements are particularly
conducive to SEC’s scrutinizing of corporate insiders’ prior transactions due to their likely
information advantage and the magnitude of potential gains from opportunistically acting upon
this information. Indeed, corporate insiders are typically considered to be aware of the
forthcoming mergers (Agrawal and Nasser, 2012), and there is well established evidence of
significant target price run-ups prior to merger announcements, with excess stock returns
reaching, on average, 30% upon announcement (e.g., Jarrell and Poulsen, 1989; Pound and
Zeckhauser, 1990; Morgenson, 2006; King, 2009).
In addition, a number of prior studies of managers’ transactions offer evidence to
suggest that the transactions of some corporate insiders are opportunistic. Cohen et al. (2012)
and Hong et al. (2018) report a significant relation between corporate insiders’ purchases /
sales and next period stock performance, indicating that some insiders trade to their own
benefit. Agrawal and Cooper (2015) explore managers’ transactions prior to accounting
scandals, and find that managers tend to sell shares in firms that needed to undertake important
restatements. Kallunki et al. (2018) explore the insider characteristics in relation to the
likelihood of them to transact based on their private information, and find less wealthy insiders
are more likely to sell prior to significant decreases in stock returns of their firms. Agrawal and
Nasser (2012) report that some corporate insiders reduce their purchases prior to merger
announcements in response to potential scrutiny they may receive from the SEC. However,
they simultaneously reduce their sales more profoundly, generating net gains from the
difference between purchases and sales.
The literature thus suggests that at least some corporate insiders may be tempted to
exploit their information advantage over other investors to their own advantage. In this paper,
7
we build on the prior literature on opportunistic trading by insiders and explore whether
deterrence articles influence their behavior prior to acquisition announcements.
2.2 Deterrence theory and managers’ decisions
Regulators aim to make markets fair, and they are keen on preventing corporate insiders
from abusing their inside information. For this reason, strict rules are present to restrict the
scope for opportunistic transactions. Trading on the basis of material inside information is
illegal, and it is natural to base our theory on work in the field of criminology. In particular,
the Classic Deterrence Theory (CDT) suggests that rational individuals decide whether to
undertake a criminal activity based on expected pleasure and pain (e.g., Zimring and Hawkins,
1973; Andenaes, 1974). Based on this theory, corporate insiders should weigh the
attractiveness of potentially large financial gains from buying shares prior to merger
announcements against the probability of getting caught and the severity of any punishment if
found guilty of illegal insider trading. The “broken windows” concept developed by Wilson
and Kelling (1982) also supports the deterrence logic, according to which the lack of law
enforcement leads individuals to think that they are less likely to be arrested, and thus the
presence of broken windows may make individuals more likely to continue to vandalize, while
the presence of non-broken windows deters them from breaking any new windows, as the
perceived threat of getting caught is higher. According to the CDT, the determination of
expected risks may be the outcome of rational and/or irrational responses to available
information that may vary amongst individuals, in line with their risk preferences and ability
to assimilate and understand information. Deterrence is indeed an established method in
criminology to prevent crime through the perception of potential consequences of one’s
activities.6
The CDT conditions the effectiveness of deterrence on individuals’ awareness that their
actions are wrong, and that there are potential consequences for their actions. These conditions
are met within the context of our study. The SEC has been responsible for regulating insider
trading since the 1934 Securities Act, and Rule 10b-5 is used to implement Section 10(b) of
the 1934 Act to determine unlawful actions by insiders. 7 Punishment for insider trading
6 See Nagin (1998) for a comprehensive review of this field. 7 In civil matters, Congress has granted the SEC authority to order the disgorgement of the illegal profits made or
losses avoided as a result of the illegal transaction plus penalties of up to three times the illegal profits. The SEC
can also suspend or permanently bar violators from serving as corporate directors or as broker-dealers through an
administrative proceeding (Del Guercio et al., 2017).
8
violations can be severe, such as the sentencing to 11 years in prison of Raj Rajaratnam in the
Galleon case in 2011.8 In 2000, the SEC adopted the misappropriation theory of insider trading
that expanded the scope of events and individuals that fall within the ambit of Section 10(b)
and Rule 10b-5, to include persons outside the firm (e.g., a relative, friend, investment banker,
lawyer). Under the misappropriation theory outside persons commit fraud when they
misappropriate material non-public information for securities trading purposes. 9 Indeed, a
number of such outsiders have also been caught after trading on inside information received
from a corporate insider prior to acquisitions. However, except for a relatively small number
of cases where successful prosecution cases have been brought against outsiders, there is no
record of who, external to the firm, may have been trading on the basis of inside information
that was passed on to them. In this study, we are therefore restricted to analyse corporate
insiders’ transactions in their own shares, due to data availability.
Therefore, as the second premise for our hypothesis, the insiders’ incentives to engage
in (legal or illegal) trading prior to merger announcements would be attenuated, at least to some
extent, by their perceived likelihood of them falling under the SEC’s scrutiny. The CDT
predicts that rational actors would be deterred from engaging in a potentially illegal activity for
fear of sanctions or punishment (Paternoster, 2010). To the extent that corporate insiders act
rationally when contemplating trades, they face a trade-off between abnormal financial gains
and anxiety/perceived risk. We posit that anxiety and perceived risk can affect both legal and
illegal trades by insiders. With respect to legal trades, the effect would transpire through
corporate insiders’ anxiety of drawing the SEC’s unwanted attention, and/or a possible
reputational damage if such attention ‘leaks out’. On the other hand, with respect to illegal
trades, the effect would be that of the fear of being caught and punished.
2.3 The impact of media coverage on individuals’ trading behavior
A third premise for our hypothesis is that media attention to negative events may
provoke investors’ anxiety and fear, and temporarily reduces their willingness to take risks.
Prior literature shows that media is an important determinant of investors’ decisions, and
studies such as Tetlock (2007), Fang and Peress (2009), and Loughran and McDonald (2011)
document a positive relationship between the tone of the published newspaper articles and the
8 See: https://www.reuters.com/article/us-galleon-rajaratnam/rajaratnam-gets-11-year-prison-sentence-
idUSTRE79C0MC20111013. [Last accessed 31 December 2018]. 9 See: https://www.sec.gov/rules/final/33-7881.htm. [Last accessed 31 December 2018].
9
stock market returns. Kaplanski and Levy (2010) show that news of negative events can elevate
investors’ general anxiety and fear, changing their risk perception and affecting their trading
behavior. Importantly, the authors document the influence of events (e.g., aviation disasters)
that have no direct relevance to investors’ incentives, neither to the performance of firms that
they invest in. If news about events that are not directly relevant to investors’ context have the
potential to elevate their anxiety and risk perception (and affect their trading), then the media
news that are directly pertinent to a specific group of investors (e.g., corporate insiders) and a
specific context (e.g., before merger announcement of their firms) are bound to be impactful.
To this end, we use the context of target firms before the merger announcement and news
articles that specifically relate to illegal insider trading in past mergers. We argue that articles
published in the Wall Street Journal that cover illegal insider trading activity in past
acquisitions can be expected to influence insiders’ perception of the risk involved in purchasing
shares in their own firm prior to forthcoming acquisition announcements.
Similar to our study, Dai et al. (2015) also explored the significance of media on
corporate insiders’ transactions. They find that when media covers past transactions by
corporate insiders, corporate insiders on average reduce the level of strategic timing of their
later transactions. They also show that the initial media coverage reduces the insiders’
subsequent transactions.
No study to our knowledge has tested whether media coverage can change corporate
insiders’ perception of the risk (e.g., anxiety and fear of SEC scrutiny) of their transactions.
Drawing on arguments presented above, we posit that media coverage of an illegal activity in
past mergers can influence insiders’ perceptions of the risk-return trade-off when
contemplating trades before the announcement of their firms’ merger deals.
Dessaint and Matray (2017) use hurricane events and show that managers overreact to
salient risks associated with the availability heuristic. Specifically, the authors find that the
sudden shock to the perceived liquidity risk leads managers to temporarily increase corporate
cash holdings and express more concerns about the hurricane risk in financial reports, even
though the actual risk remains unchanged. Such a discrepancy between perceived and actual
risk can be affected by factors such as salience of the event, and/or its proximity that are
unrelated to actual frequency. In our setup, when an article is published or has been recently
observed, the availability of litigations and reputation damages is high and its probability is
overestimated. On the other hand, in times without articles, these infrequent events are less
available and their probability is underestimated. If media coverage affects the perceived risk
10
of SEC scrutiny and potential punishment, and therefore the pleasure vs pain trade-off,
publication of these articles can be expected to temporarily deter some corporate insiders from
trading prior to acquisitions.
3. Data and methodology
3.1 Datasets used
To test our predictions, we collect data from several sources. We obtain our initial
sample of target firms in US public-to-public merger deals announced from SDC Thomson
OneBanker10 and match these target firms with their corporate insiders’ purchases from the
Thomson Reuters insiders filing database11 via the CUSIP code.12 In addition, we use the
Centre for Research in Security Prices (CRSP) and Compustat databases to collect stock return
data and balance sheet data for firm characteristics such as market-to-book ratio and historical
stock return that are used as control variables in our estimations. This leaves us with a sample
of 1,541 merger announcements between January 1996 and June 2014.
Our deterrence articles come from Factiva. In particular, we use Factiva to identify
articles published in the Wall Street Journal that refer to illegal transactions prior to past merger
announcements. As in other media studies (e.g., Tetlock, 2007; Fang and Peress, 2009; Ahern
and Sosyura, 2014), we base our study on articles published in the Wall Street Journal whose
circulation is the highest amongst US newspapers.13 We first collect all articles available with
the term “inside*” in the Wall Street Journal headline, where * indicates the letter(s), if any,
following the asterisk. We then study each of the headlines and the lead paragraph to identify
which of these articles refer to illegal transactions prior to US merger announcements. Note
10 Following the sample selection procedure commonly adopted in prior works (e.g., Agrawal and Nasser, 2012),
we require the deal value of each acquisition to be at least $1 million. In addition, we restrict our sample to
acquisitions of at least a 50% stake, and to transactions where the target company size is at least 1% of the market
value of the bidder. 11 We access corporate insiders’ purchases from the Thomson Reuters insiders filing database. In line with prior
literature (e.g. Cohen et al., 2012), we focus on Form 4 filings and select only open market stock transactions by
main corporate insiders (transaction code with “P”). We include stock transactions available from “Table 1” in
the insiders filing database. In line with Agrawal and Nasser (2012) and Dai et al. (2015), we drop transaction
code with “S” or “A”, while including transactions by “directors”, “officers” and “blockholders”. 12 The initial matching between the target firms and their corporate insiders’ transactions via the CUSIP code
results in deals from 1991. Applying the restriction of including purchases with transaction code “P” only results
in deals from 1993 onwards. The number of such purchases is very small before 1996 and therefore we exclude
deals before 1996. 13The printed circulation is around 2.4 million copies a day (as of March 2013) and currently 42.4 million online
users read news from the Wall Street Journal per month.
https://en.wikipedia.org/wiki/List_of_newspapers_in_the_United_States_by_circulation.
http://www.wsjmediakit.com/products/online.
11
that the selection of articles is manual rather than based on some simplifying algorithm, thus
minimising the level of noise in this measure.14
3.2 Dependent variable
We use three variables as our dependent variable in order to ensure the robustness of
our findings: the daily number of purchases by corporate insiders in target firms, the daily sum
of the percentage of equity purchased, and the daily sum of the value of the purchases in $.15
We examine corporate insiders’ purchases during the interval between 90 and 2 calendar days
prior to each merger announcement.16 To ensure that results are not driven by deterrence
articles published just before day -90 (where day 0 refers to the day of the bid announcement),
we only include mergers in our estimations without any deterrence article published in the
interval period between day -120 and -91. We stop at day -2 prior to each merger
announcement, since there is normally a significant increase in stock returns of target firms on
day -1 which is commonly considered part of the announcement returns.
In untabulated tests, we also use alternative intervals (from day -60 or day -120 until
day -2) and observe that our main results persist. However, this is no longer the case when the
interval is extended much beyond day -120 (e.g., when starting from day -300). This is as
expected, as corporate insiders are more likely to be influenced by deterrence articles that are
relatively close to the date of merger announcement. Target company insiders are unlikely to
be in possession of inside information about the forthcoming acquisitions this early. Even if
they were, it would arguably be more difficult for the SEC to prove. As shown in Figure 1, the
number of purchases in the 12 months prior to merger announcements begins to decline only a
few months before the announcements, with the most noticeable decline in the last 90 calendar
days or 60 trading days prior to the announcements. This would suggest that insiders tend to
gain awareness of the forthcoming acquisitions on average a few months before public
14 An example of such a news article in the Wall Street Journal has the following headline, “Feds Accuse P&G
Director – SEC Alleges Official Passed Insider Information on Berkshire’s Deal With Goldman”. It was published
in the cover page on 2 March 2011 and the Berkshire’s deal in question was during the financial crisis of 2008. 15 In this study, we focus on insides’ purchases rather than sales. Managers often sell shares on a regular basis,
and Agrawal and Nasser (2012) find that insiders may also take advantage of their private information by reducing
their normal levels of share sales prior to merger announcements. Unlike purchases, it is, however, much less
clear what impact fear articles will have, if any, on sales activity prior to merger announcement. For instance, if
insiders have an incentive to refrain from selling due to expected gains from forthcoming bids, fear articles may
have limited incremental impact on insiders’ propensity to sell. 16 We use trading days for regression analysis and we use calendar days for article-related variables. The cleaned
transaction dates from the Thomson Reuters insiders filing database are weekdays, although the as-reported
transaction dates can be over the weekend. We use the cleaned transaction dates for analysis.
12
announcements. The risk of SEC scrutiny is therefore expected to be higher if trading takes
place close to the bid announcement, and corporate insiders may not be influenced to the same
extent by the publication of a deterrence article if it arrives a long time before the merger
announcement.
[ please insert Figure 1 around here ]
While our data analysis reveals there to be a significant number of days with no
purchases by corporate insiders, we do not restrict our sample to mergers with purchases, since
this would results in look-ahead bias. Zero transactions are also meaningful for the purposes of
this study, since we argue that corporate insiders would be more hesitant about purchasing
shares after reading a deterrence article. If we had excluded mergers with zero purchases prior
to merger announcements, we would have in substance disregarded the underlying theoretical
link of our study.17 We use Poisson regressions for our main tests because this approach is most
commonly used when the dependent variable is based on count data. However, because of the
significant number of daily zero purchases, in additional tests we also use a number of
alternative estimation methods, including censored Tobit regressions, OLS, and zero-inflated
negative binomial (e.g., Cameron and Trivedi, 1998; Tobin, 1958). Our results are robust to
alternative estimation techniques.
3.3 Main independent variable
Our main independent variable is the first fear article published prior to each merger
announcement. As previously discussed, fear articles are identified from Factiva after searching
for articles that cover illegal activity prior to past merger announcements. “Fear article” is a
dummy variable that takes the value of one from the day the deterrence article was published
(from calendar day -90 onwards) until day -2 (where 0 is the merger announcement day). If
more than one deterrence article was published prior to a particular merger announcement, we
consider the day the first fear article was published until day -2. We add dummies to control
for the additional fear articles published before merger announcements.
In our sample, 903 of the mergers had at least one fear article published in the lead up
to the merger announcement, while 638 deals had no fear articles published prior to merger
announcements. Only 386 mergers had two or more fear articles published, with a maximum
17 Giglio and Shue (2014) show that the passage of time with no news is informative. In our study, the absence of
trading contains meaningful information.
13
of seven fear articles published before nine merger announcements. By construction of our fear
dummy, a larger proportion of mergers will have a fear article published during the pre-bid
period as we move closer to the merger announcement day. We find no pattern in the timing
of fear articles prior to merger announcements. There is no reason to expect that the deterrence
articles would appear more frequently during any period prior to merger announcements than
others, since they relate to past mergers and are thus exogenous to the forthcoming mergers.
However, to control for possible timing effects on our results, we include fixed effects for every
10 trading-day period prior to each merger announcement [i.e., (-60,-51), (-50,-41), etc.], as
discussed in section 3.4 on control variables below.
To test whether the publication of a deterrence article affects the level of insider trading
prior to merger announcement, we compare corporate insider purchases during the period from
the day the first deterrence article was published until day -2 in relation to the level of trading
before the publication of the deterrence articles, and with merger deals without any published
fear article before their announcements. We also include data from the period before each
publication of a fear article in order to capture the possible impact on insiders’ purchases from
potentially earlier sources of the information discussed in deterrence articles. Our main
hypothesis will be supported if the estimated coefficient on the “fear article” dummy is
significantly negative, which would indicate a reduction in the level of corporate insider
purchases from the day the deterrence article was published, onwards.
3.4 Control variables
We use a number of control variables that prior literature documents as potential
determinants of corporate insider transactions. We first control for whether there was a
takeover rumor for a particular target firm. To identify rumored merger deals, we download
articles from any source available from Factiva prior to each merger announcement that
includes the name of the target firm and any of the following terms: merg*, acqui*, target,
takeover, rumour*, rumor*, buyout, and bid* anywhere in the article, where * indicates any
letters (if any) following the asterisk. We study each individual article to ensure that it refers
to a potential merger of the particular target. We add a dummy for mergers with rumors to
control for corporate insiders who may transact more heavily based on their private information
when the public is aware of a forthcoming deal (Kyle, 1985).
14
We add 10-day fixed effects prior to each merger announcement [(-60,-51), (-50,-41),
etc.] in order to control for whether corporate insiders may be more hesitant to purchase shares
of their own firms close to the merger announcement, as transacting close to the merger
announcement may heighten the probability of SEC scrutiny (Agrawal and Nasser, 2012). We
include the target to bidder relative size ratio as a proxy of the significance of the forthcoming
merger deal. Corporate insiders are likely to be aware of the significance of the deal, and
relatively large mergers deals may be more likely to receive scrutiny by the SEC.
We also control for a number of firm characteristics. In particular, we control for target
firms’ market capitalization, market-to-book ratio, historical stock price return and standard
deviation of stock price returns. We also control for tender offers, since tender offers can be
hostile deals that could potentially take place without the managers of the target firms being
aware until very close to the merger announcement. We also add industry dummies as available
from SDC Thomson OneBanker. These are commonly used controls in the corporate insider
transactions literature in order to ensure that firm characteristics do not drive the relation (e.g.,
Agrawal and Nasser, 2012). We do not tabulate the parameter coefficients on industry, and 10-
day fixed effects for space consideration (results available upon request). Detailed variable
definitions are shown in the Appendix.
4. Empirical results
4.1 Univariate results
We first report the univariate results. Panel A of Table 1 shows the descriptive statistics
of the variables used in this study. Note the significant number of days without any purchases
by corporate insiders. As an example, the median daily number of purchases by corporate
insiders is zero. On days when purchases do occur, the mean value is $1,529, with a maximum
of $8,273,053.
[ please insert Table 1 around here ]
Panel B of Table 1 reports the average number of purchases per day during the 10
trading-days before and after the publication of fear articles (day 0). To ensure that there are
no overlaps, we only include mergers with one fear article published within 90 to 2 days prior
to the bid announcement. While we observe a small number of corporate insider purchases on
days 0 and +1, we find that there are no purchases on days +2 to +7 after the publication of a
deterrence article. Overall, these results offer the first indication that the publication of
15
deterrence articles seems to reduce purchasing by corporate insiders, in line with the developed
hypothesis.
Panel C of Table 1 provides the univariate mean test results of the significance of the
impact of published fear articles on purchasing activity by corporate insiders. In these tests, we
use the full period after the publication of a fear article until two days before each merger
announcement to estimate daily purchases. We conduct mean tests on the three variables of
insider purchases (i.e., the number of purchases, the percentage of outstanding equity acquired,
and the total value of shares bought) between mergers without any fear articles and mergers
with a fear article. In addition, we use deals with a fear article and conduct similar mean tests
on the same set of variables comparing the level of insiders’ purchases after versus before the
publication of the fear article. We find that on average the level of insider purchasing activity
in mergers with a fear article is significantly lower than that in mergers without a fear article.
We also find evidence of a significant reduction in purchases after the publication of deterrence
articles, in line with our hypothesis. For example, the average daily number of purchases is
0.0126 for mergers without any deterrence article, and 0.0088 with the publication of a
deterrence article. While the numbers are small, the difference in purchasing activity by the
corporate insiders between the two groups is statistically significant, with a p-value equal to
0.0307. Results are similar when looking at other variables of purchases and when comparing
insiders’ purchases after versus before the publication of a fear article. The impact of deterrence
articles on purchasing activity by the corporate insiders is non-trivial. While there are few
purchases overall, the reduction in trading after the publication of a deterrence article on
average exceeds 30%.
4.2 Multivariate results
In this section we present the main test results for the relation between media deterrence
and target company insiders’ share purchases prior to merger announcements, based on
multivariate estimations that control for a number potentially influential variables. Results are
reported in Table 2. We first estimate the relation without control variables for each of our
three dependent variables in columns 1 to 3, while in columns 4 to 6, the control variables are
included.
We find the parameter coefficient on the fear article to be negative and highly
significant, irrespective of whether we consider the impact on the number of purchases, the
16
number of shares purchased, or the value of shares purchased. The coefficient of -0.389 with a
p-value of 0.000 on the number of purchases, indicating the log of the expected number of
purchases is expected to decrease by 0.389 units, holding the other variables in the model
constant. Alternatively, the rate ratio for number of purchases is expected to decrease by a
factor of 0.678. The magnitude of the parameter coefficients are meaningful, considering the
relatively small number of purchases by corporate insiders on any given day during the period
leading up to merger announcements, as discussed earlier. These results thus support our main
hypothesis, indicating that corporate insiders on average undertake fewer purchases after the
publication of a fear article in comparison to what they do either before the relevant publication,
or in in relation to what they do prior to mergers where no fear article is published during the
lead up to the bid announcement.
[ please insert Table 2 around here ]
4.3 The mechanism behind the relation
We next explore the underlying mechanism that drives the relation between deterrence
articles and insider trading. In Section 2 we conjecture that insiders may be tempted to purchase
stocks of target firms prior to merger announcements in expectation of significant average stock
returns in the period leading up to and including the bid announcement, as shown in Figure 2.
However, not all targets see significant stock prices increase, and in untabulated results we find
that in almost 15% of the sample, there is no positive abnormal return over the interval period
between 60 trading days before to 1 day after the day of the bid announcement. If target
company insiders have information to help predict the stock market reaction to the forthcoming
bid announcement (e.g., from knowing the likely terms of the deal), insiders may be expected
to use this when deciding whether or not to trade. Our results are consistent with such a
conjecture, as shown in Table 3. Results in column 1 indicate that insiders are indeed
significantly more likely to purchase shares during the lead up to the bid announcement when
the cumulative abnormal stock returns of target firms from day -60 to day +1 are positive.
[ please insert Figure 2 and Table 3 around here ]
We also expect that the extent of insiders’ reaction to the publication of fear articles
would be related to the magnitude of the potential gain. Based on the pleasure versus pain
trade-off premise of the Classic Deterrence Theory, there should be relatively less response to
the publication of a deterrence article when insiders can expect significant gains. To test this,
17
we interact the cumulative abnormal returns for each deal in the period -60 and + 1 with the
fear articles. We find that the parameter coefficient on the fear article dummy remains
significantly negative, as shown in columns 2 to 4, but importantly, that the coefficient on the
interaction variable (fear * cumulative abnormal stock returns) is significantly positive. The
results support our conjecture that when corporate insiders’ potential gains are higher, the
publication of fear articles exert a smaller deterrence effect on insiders.
We further expect that a higher level of concurrently ongoing formal SEC
investigations would reduce the impact of the published fear articles on insiders, as during such
periods of ‘high salience’ of the SEC, insiders will likely anyway be more hesitant to transact
based on their private information. Conversely, the published articles are expected to exert
stronger influence on insiders when there is less formal activity by the SEC. In the latter case,
the articles would serve as a reminder to insiders of the potential risks from trading based on
their private information. We follow Del Guercio et al. (2017) and obtain the annual number
of formal SEC investigation, and we interact this with the number of fear articles. The results,
reported in column 5 of Table 3, show that insiders’ purchases are negatively related to the
level of formal SEC investigations. This result indicates that the SEC’s actions influence the
likelihood of insiders taking advantage of their private information. In line with our
expectation, we further find the parameter coefficient for the interaction variable between fear
articles and the number of SEC investigations to be significantly positive, as shown in columns
6 to 8. We conclude that fear articles have a stronger deterrent influence on insiders when the
number of formal SEC investigations are relatively low.
Finally, we explore whether the size of the target firm affects the impact of fear articles
on insider purchases. Due to resource constraints18, the SEC may be more likely to scrutinize
relatively large deals than they are small ones. Managers of small firms may therefore possibly
perceive the risk from trading prior to merger announcement to be lower than that of managers
in larger targets. We use a dummy for small target firms with market capitalization of less than
$100 million. As shown in column 9 of Table 3, the parameter coefficient of the small size
target firms is indeed significantly positive, indicating more opportunistic behavior by insiders
of small size target firms. If insiders in large companies are more cautious about trading than
those in smaller firms, fear articles may have more impact on insiders in small firms by alerting
18 While Seligman (2004) and Del Guercio et al. (2017) indicate that SEC’s resources have generally increased
over time (with increases in funding mainly after scandals and during market downturns), the agency may still not
have sufficient resources to investigate all trades.
18
them to the risks involved. In line with our expectation, the parameter coefficient of the
interaction variable in columns 10 to 12 is significantly negative, suggesting that managers of
small size firms respond more strongly to the publication of the fear articles.
4.4 The significance of the visibility and the severity of the articles
We next test whether the characteristics of the fear articles affect the strength of our
relation. We conjecture that it is more likely that insiders would notice and react to fear articles
that: (i) are longer, (ii) appear on the first page of the main sections of WSJ, and (iii) are more
severe in terms of content. Longer articles and those published on a front page are likely to
have more visibility and may therefore make more of an impression. While Beccaria (1764)
argues that it is the unerringness of punishment rather than the harshness of punishment that
will have the bigger impression on behavior, Del Guercio et al. (2017) argue that the threat of
a prison sentence for those convicted in a criminal trial likely has a much more potent deterrent
effect than the civil remedies available to the SEC. However, they also note that the probability
of a successful criminal conviction is also much lower. Whether the severity of the content of
the article influences the deterrence effect is therefore an open empirical question.
We first explore the impact of the length of the fear articles (as captured by the number
of words). As reported in columns 1 to 3 of Table 4, we find that the parameter coefficient on
the length of the articles is significantly negative. In line with our expectation, longer articles
seem to have more of an impact on the insiders’ behavior, and is associated with a larger
reduction in their share purchases after relevant publications.
[ please insert Table 4 around here ]
In columns 4 to 6 of Table 4 we explore whether articles on the front page of one of the
main sections of the Wall Street Journal (i.e., sections A, B or C) have more of an impact than
articles on other pages.19 The coefficient on “Front page” captures the incremental impact for
articles on the front page in comparison to the impact of fear articles published elsewhere in
the newspaper (as captured by the coefficient on the “Fear article” variable). Both variables are
highly significant in all three models, indicating that articles published on the front page of
19 Only three deterrence articles appear on the front page of the newspaper. We therefore combine the number of
articles on the front pages of the various sections of the WSJ. There are 9 articles which have no page citations
from Factiva. Our main results do not change if we remove these articles from the sample.
19
each section have significantly stronger deterrence effect on insiders’ purchases, although other
articles also have a significant impact.
Finally in this section, we test whether the content of the deterrence articles matters.
We split our articles into three groups based on their severity as indicated by the terms used in
the headline. We include articles with terms “charge”, “indict”, or “accuse” in the second group
of severity. Such articles account for 46% of the sample. Articles that contain the terms
“guilty”, “fined”, “convicted”, “fines”, “prison”, “sentence”, or “jail” are included in the third
group of severity. These articles comprise 23.6% of the sample. Finally, articles without any
of these terms are included in the first group of severity (29.3% of the sample). Columns 7 to
9 of Table 4 report the significance of the fear articles in relation to their severity. We find
evidence to suggest that insiders tend to reduce their purchases more after publication of
articles that use more severe terms. The coefficient on “Severity group 2” captures the
incremental impact for articles in the second group in comparison to the impact of fear articles
in the first group (as captured by the coefficient on the “Fear article” variable). Similarly, the
coefficient on “Severity group 3” captures the incremental impact for articles in the third group
in comparison to the impact of fear articles in the other groups. The results in general suggest
a monotonic increase in the strength of the deterrence effect as we move to articles with higher
severity, although some of these increases are not statistically significant. This finding is,
nevertheless, consistent with the quote saying that it is the probability rather than the severity
of the punishment that can more effectively deter wrongdoing.
4.5 The duration of the fear articles’ impact on insider purchases
While the fear articles are expected to raise the anxiety of trading based on inside
information, the real risk of engaging in insider trading may not change as a result of the
publication of the articles.20 We expect the deterrence effect to be a short-term reaction to the
publication of fear articles, and that the effect may become weaker as time passes since the
publication of the article. We explore here the duration of the impact of the fear articles on
insiders’ purchases. We use the sample of merger deals with one fear article only for this
analysis, since this sample selection offers a “clean” testing period without the existence of
overlapping articles. We thus compare the insider purchases after versus before the publication
of a fear article.
20 We explore this further in section 4.6 below.
20
We test the significance of the duration for all our dependent variables, with results
reported in Table 5. We first report in Columns 1 to 3 the baseline regression (as in the main
analysis in Table 2) for comparison purposes. Once again we find that the parameter coefficient
for the fear article is significantly negative, indicating that our main results are not driven by
our sample selection. We then test the purchasing activity by the insiders in relation to how
many days have lapsed since the fear article was published. We expect the magnitude of the
relation to be less pronounced with the passing of time. That is, the parameter coefficient for
the “Days since the article” variable is expected to be significantly positive, indicating more
purchases as time lapses after the publication of the article. This is indeed what we find for the
number of purchases and the total value of shares bought, as shown in columns 4 and 6,
although the coefficient for the percentage of equity bought in column 5, while positive, is not
statistically significant.
[ please insert Table 5 around here ]
Further, we explore the relation between deterrence articles and insiders’ purchases
when excluding the first five or ten days after each article publication, and re-run the main tests
for the remaining days, to see if there is a longer-term effect from the publication of the articles.
We expect the relation to weaken (or disappear) when excluding the days closely after the
publication of the fear articles. The results in columns 7 to 12 of Table 5 show that this is indeed
the case. As an example, we find that the parameter coefficient for the fear articles is -0.456
and significant at the 1% level using the full period as shown in column 1, but falls to -0.223
and is no longer statistically significant as shown in column 7 when excluding the first five
days after each fear publication. Finally, if excluding the first 10 days after the article, the effect
disappears, as shown in column 10.
To further explore the duration of the impact of the fear articles, we final run the main
regression for each day separately, starting on the day of the publication of a deterrence article,
and for the next ten days. As shown in Figure 3, there is a monotonic decrease in the strength
of the relation as we move further and further away from the day of the publication of the fear
article. This offers initial evidence that it is the publication of the fear articles that generates
our pattern, and not potentially other unobserved characteristics. In untabulated results, we also
21
find that there is no clear pattern on corporate insider reaction on fear articles beyond ten days,
showing that there is no reversal on their initial response.21
[ please insert Figure 3 around here ]
This reduction of the magnitude of the parameter coefficients is similar when using
alternative dependent variables in our estimations. The deterrence effect thus seems to be short-
lived. While the publication of deterrence articles have a significant impact on insiders’
behavior at the time of announcement, the temporary nature of the effect may suggest the effect
is a behavioral response, as if the fear articles were foretelling a tightening of insider trading
enforcement, a longer term effect might have been envisaged. We explore this further in the
next section.
4.6 Perceived risk versus informational channels
Our results indicate that the publication of fear articles have a significant, impact on
insider behavior. However, with articles referring to insider trading violations in past mergers,
such articles are arguably not expected to change the real risk of insides from trading in the
lead up to merger announcements. This, together with the temporary nature of the effect, as
discussed in the previous section, would suggest that the change in behavior we observe is
largely behavioral and a result of a change in the perceived risk of trading.
However, it is possible that the fear articles precede regulatory changes and as such
contain (or proxy for) relevant information about current or forthcoming changes in the actual
risk of engaging in insider trading. In this section we aim to disentangle the “perceived risk”
channel against the alternative “information” channel. To that end, similar to the way we
construct the fear article variable, we identify manually sixteen articles that clearly indicate
greater SEC enforcement in the future, and construct a dummy variable called “SEC tightening
article” in a similar manner.22 Columns 1 to 3 of Table 6 show that the impact of fear articles
remains highly statistically significant after including the Sec tightening article dummy. As a
21 In a further test of the timeliness of the WSJ news articles, we also explore whether there is any change in
insiders’ trading behaviour prior to the WSJ publication date. This could be the case if the WSJ e.g., report on
events which may have occurred (and possibly picked up by insiders from other news sources) prior to the WSJ
publication. In untabulated results, we find a reduction in insider trading starting only a few days prior to the
publication of the article (up to approximately five days) but not earlier, suggesting the WSJ publications are
timely. 22 One example of such an article has the following headline, “Insider Targets Expanding --- FBI Is Building
Cases on 120 People for Alleged Illegal Trading, Enlists Douglas”, dated on 28 February 2012.
22
further check, we use the article length and front page (as in Table 4) and the results still hold,
as shown at columns 4 to 9. For instance, regarding the number of purchases, we find that the
coefficient of the fear article dummy variable is -0.400 and that of the length variable is -0.060
(both statistically significant at the 1% level). These estimates are similar to those in Tables 2
and 4, suggesting our results are unlikely to be driven by a contemporaneous change in SEC
strictness towards insider trading activity.
[ please insert Table 6 around here ]
We also explore time trends in the publication of fear articles, SEC enforcement actions
and insider purchases. As shown in Figure 4, the time trends of fear articles and SEC formal
investigations (on an annual basis) move in the opposite directions – there are more SEC formal
investigations and fewer fear articles over time. Note that our articles do not necessarily refer
to SEC investigations only. In addition, insider trades seem to respond to SEC investigations
more, especially the formal ones – a higher level of SEC enforcement actions is followed by a
reduced level of insider purchases, e.g., around year 2003 or year 2009. This result indicates
that the reputation risk is an important factor in the potential costs of illegal insider trading.
Collectively, we do not find supporting evidence that these fear articles indicate a change in
real or actual risk of getting caught.
[ please insert Figure 4 around here ]
4.7 Robustness tests
This section summarizes various robustness tests of the main relation between fear
articles and insider trading we find in this study. We first test the robustness of the relation to
use of alternative econometric approaches. In Table 7 we first report the main results based on
Tobit estimation, which we use to address the issue of (left) censoring in the dependent
variables, in columns 1 to 3. We then add merger fixed effects and use Panel estimation
(columns 4 to 6). In further estimations, we estimate the parameter coefficients using Poisson
estimation (columns 7 to 9) and OLS (columns 10 to 12) for merger deals with at least one
purchase. Finally, we use the zero-inflated negative binomial estimation that addresses the
issue of the many zeros in our data (columns 13 to 17). Apart from the parameter coefficients
on the fear articles in columns 10 and 13 that are not quite statistically significant, all others
are significantly negative. Note that the OLS estimations are affected by the very large number
of firm-days with zero insider trades in our dataset and thus, OLS estimations likely under-
23
estimate the magnitude of the relation. Overall, these results highlight the robustness of the
relation to a range of alternative estimation methods.
[ please insert Table 7 around here ]
We further explore whether routine traders may be behind the pattern rather than
insiders engaging in opportunistic trading. In the spirit of Cohen et al. (2012), we identify
routine traders as those who have bought shares in their own firms in the same quarter for three
consecutive years. These may be routine traders who make similar transactions each year and
whose transactions may not reflect opportunism. To ensure that our results are not driven by
routine corporate insider purchases, we exclude such trades and re-estimate our results. As
shown in columns 18 to 20 of Table 8, the relation holds after relevant exclusions. If anything,
the relation becomes slightly stronger in economic terms when compared to the initial results
in Table 2, with parameter coefficients of -0.605 versus -0.389 (from Table 2) in relation to the
number of purchases, -0.876 versus -0.759 for the sum of the shares purchased, and -0.633
versus -0.485 for the value of such purchases, respectively.
Finally, we test whether the results hold if focusing on the individual insiders rather
than the target firms. For this test, we focus on insiders who undertake at least one trade in the
lead-up to an acquisition, and compare their level of purchases before and after the publication
of a fear article. Our results hold, confirming our main result that there are significantly fewer
purchases after the publication of fear articles (column 21) and of significantly lower value
(columns 22).
4.8 Placebo testing
Insiders are unlikely to be in possession of inside information about the forthcoming
acquisitions long before the merger announcements, and even if they did, it would be more
difficult for the SEC to prove a potential illegal activity. We would therefore not expect fear
articles to have an impact on insider purchasing activity a long time before the merger
announcements. As a placebo test, we therefore estimate the relation when using the relatively
early interval period between 270 and 180 calendar days prior the merger announcement rather
than the period from -90 to -2 used in the main analysis. We would expect fear articles to have
no impact on insiders’ transactions during this early time period, as insiders would likely have
little to fear if trading more than six months prior to a bid announcement. In line with our
24
expectation, results in Table 8 show that fear articles are not negatively associated with insider
trading activity during this earlier period.23
[ please insert Table 8 around here ]
5. Conclusion
This study explores whether news articles referring to illegal insider trading in past
acquisitions affect target company insiders’ trading behavior prior to public announcements of
takeover bids for their companies. Such news stories may temporarily heighten the fear and
perceived risk of purchasing shares in the lead up to merger announcements, leading to a
change in behavior. We are focusing on corporate insiders’ purchases of shares in their own
company prior to the firm receiving a takeover bid, since target firms tend to experience
significant increases in their stock returns prior to their merger announcements. Based on a
sample of US acquisitions between 1996 and 2014 and articles in the Wall Street Journal
relating to insider trading, we find a significant reduction in purchases by target company
insiders after the publication of an article referring to illegal insider trading in past merger
deals.
We find that the reduction in insider purchases is most pronounced where the article is
published on a front page of one of the Wall Street Journal section front pages rather than
inside the paper, and the impact is also stronger when the article is long. The visibility of the
article seems to matter. The effect is also stronger when the content of the article is more severe,
such as discussing people being prosecuted or convicted of illegal insider trading. Such articles
may again draw more attention and still a higher level of fear in insiders than other insider
trading related articles. However, if insiders weigh up the pleasure (potential gain) of trading
against the potential pain (risk of getting caught), as predicted by the Classic Deterrence theory,
we might expect the impact of deterrence articles to be weaker when the expected gains from
buying would be higher (i.e., when there are higher abnormal returns in the run-up and
including the period of the bid announcement). This is indeed what we find. We also find the
deterrence article effect to be weaker during periods when there are more formal investigations
by the SEC – periods when insiders may anyway be fearful of engaging in trading for fear of
attracting unwanted SEC attention. The effect holds when controlling for other news stories
23 Columns 1 to 3 include all control variables, industry fixed effects, and prior-to-article fixed effects, but not the
10-day interval fixed effects and the multiple-article dummy.
25
which may indicate a tightening of SEC enforcement, suggesting the reaction to the fear articles
may be mainly a behavioral effect rather than a rational response to changes in the real risk of
censure for insiders who trade.
While fear articles may heighten insiders’ perception of the risk from engaging in
insider trading, we do not find that the fear articles, which refer to insider trading violations in
past mergers, help predict e.g., changes in SEC policies or enforcement of changes. There is
thus no evidence to suggest the change in behavior is the result of changes in the real risk of
engaging in insider trading. Rather, it would appear to be a behavioral response. This is also
supported by the relatively short term nature of the deterrence effect, with the negative relation
between fear articles and insiders’ level of trading purchasing dissipating gradually within a
ten day interval following relevant publications.
A possible limitation of our study is that it is not possible for us to know who of the
corporate insiders may have read the particular articles published in the Wall Street Journal.
However, managers are generally considered to be informed market participants, and we would
argue that it is reasonable to assume that a significant proportion of them regularly read
financial newspapers, such as the Wall Street Journal which has the highest circulation of US
newspapers. Importantly, to the extent that some insiders have not read the Wall Street Journal
‘fear articles’, this would bias against the results against our hypothesis. We may therefore, if
anything, be underestimating the magnitude of the relation reported in this study. Our results
highlight the importance of the media in influencing investor behavior and its role in deterring
insiders from using their information advantage for private gain.
Acknowledgments
We would also like to thank Christopher Flanagan for his support during data collection. Jo Danbolt holds the
Baillie Gifford Chair in Financial Markets, and his research is partially funded by a Baillie Gifford endowment
held by the University of Edinburgh Business School. Baillie Gifford has no role in or influence over the research
conducted.
26
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University of Chicago Press.
28
Appendix: Variable definitions This appendix presents the variables used for the main empirical analysis (in alphabetical order) and describes
their construction. All days represent trading days. We obtain stock price data from CRSP, balance sheet data
from Compustat, and deal-specific information from Thomson ONE. All balance sheet items are measured at the
fiscal year end before the deal announcement date, obtained from Thomson ONE, unless noted otherwise.
Variable Definition
Fear article An indicator variable taking the value of one if there is a fear article on or prior to
the day, and zero otherwise.
Historical stock return Average daily excess returns of the target over the last four years compared to S&P
500 (winsorized at the 1% level).
Market-to-book Market to book ratio of common equity of the target (Compustat data items: prcc_c
* csho / ceq, winsorized at the 1% level).
Market value The natural logarithm of target’s market capitalization (Thomson ONE data item:
Target Market Value 4 Weeks Prior to Announcement ($mil)).
Number of purchases The number of purchases
Percentage of equity
purchased
The natural logarithm of one plus the number of purchases divided by the number
of shares outstanding
ln(1 + 104 * shares (from Thomson Reuters insiders filing)/1000 * shrout
(from CRSP))
Rumor An indicator variable taking the value of one if there is a takeover rumor pertaining
to the deal before the announcement date, and zero otherwise.
StdDev of returns The natural logarithm of one plus the standard deviation of daily stock returns
computed over trading days (−250,−126) relative to the announcement date.
Target-bidder ratio The natural logarithm of one plus the ratio of target’s market capitalization to
bidder’s market capitalization
ln(1 + (Target Market Value 4 Weeks Prior to Announcement
/(csho_Acq*prcc_f_Acq)) * 100)
Tender offer An indicator variable taking the value of one if the deal is a tender offer, and zero
otherwise. The corresponding data item from Thomson ONE is “Tender Offer
(Y/N)”.
Value of purchases The natural logarithm of one plus the dollar value of purchases
ln(1 + shares * tprice (both from Thomson Reuters insiders filing))
29
Table 1 Descriptive statistics
Panel A: Descriptive statistics of variables used
Mean Median Min Max Dev. N
Deal-trading-day based variables
Number of purchases 0.011 0 0 20 0.225 93,213
% equity purchased 0.001 0 0 3.8 0.027 93,213
Value of purchases ($) 1,529 0 0 8,273,053 70,949 93,213
Number of purchases, where at least one purchase 2.064 1 1 20 2.269 503
Deal-based variables
Rumor 0.14 0 0 1 0.34 1,541
Tender offer 0.16 0 0 1 0.36 1,536
Market value (of target) (ln) 5.48 5.39 -0.24 11 1.79 1,526
StdDev of returns 1.42 1.38 0.41 3.59 0.44 1,516
Target-to-bidder ratio (ln) 2.48 2.59 -1.29 6.23 1.38 1,450
Market-to-book 2.82 1.86 -2.15 25.99 3.67 1,458
Historical stock return 0.08 0.07 -0.22 0.54 0.12 1,520
Panel B: Insider transactions around the publication of the article (Day 0) of mergers with a fear article
Day Number of purchases % equity purchased Value of purchases Number of deals
-10 0.0077 0.0003 289.20 391
-9 0.0079 0 376.12 378
-8 0.0155 0.0014 535.02 387
-7 0.0186 0.0011 3,276.02 430
-6 0.0149 0 34.51 268
-5 0 0 0.00 190
-4 0.0065 0 25.73 310
-3 0.0048 0.0002 61.39 413
-2 0 0 0.00 406
-1 0.0047 0 0.50 422
0 0.004 0.0002 63.53 497
1 0.007 0 7.04 287
2 0 0 0.00 191
3 0 0 0.00 314
4 0 0 0.00 401
5 0 0 0.00 385
6 0 0 0.00 389
7 0 0 0.00 435
8 0.0041 0 62.48 245
9 0.0116 0 2.86 173
10 0.0172 0.0014 217.07 290
Panel C: Mean tests
Mergers
without a
fear article
Mergers
with a fear
article
Difference
(two-sided)
Mergers with a fear
article
Difference
(two-sided)
Before the
article
Since the
article
Number of purchases 0.0126 0.0088 -0.0214**
(0.0307)
0.0109 0.0068 -0.0177**
(0.0365)
% equity purchased
(ln transformed)
0.0086 0.0050 -0.0136***
(0.0004)
0.0073 0.0029 -0.0102***
(0.0007)
Value of purchases
(ln transformed)
0.0620 0.0383 -0.1003***
(0.0000)
0.0509 0.0266 -0.0775***
(0.0006)
Number of
observations
38,753 30,788 14,811 15,977
This table offers the descriptive statistics of the variables used in this study. See detailed variable definitions in
the Appendix.
30
Table 2 Insider purchasing activity after the publication of fear articles
# purchases sum %
equity
sum value
purchases
# purchases sum %
equity
sum value
purchases
(1) (2) (3) (4) (5) (6)
Fear article -0.451*** -0.769*** -0.552*** -0.389*** -0.759*** -0.485***
(0.000) (0.000) (0.000) (0.000) (0.000) (0.000)
Rumors 0.119 0.177 0.078*
(0.231) (0.167) (0.087)
Tender offer -0.273** 0.239** 0.327***
(0.012) (0.025) (0.000)
Market value -0.013 -0.303*** -0.055***
(0.573) (0.000) (0.000)
StdDev of returns -0.278*** -0.348*** -0.322***
(0.005) (0.003) (0.000)
Target-bidder ratio 0.061** 0.174*** 0.115***
(0.016) (0.000) (0.000)
Market-to-book -0.069*** -0.042** -0.023***
(0.000) (0.016) (0.000)
Historical stock return -1.322*** -1.527*** -1.559***
(0.000) (0.000) (0.000)
Constant -4.055*** -4.845*** -2.967*** -3.039*** -1.779*** -1.247***
(0.000) (0.000) (0.000) (0.000) (0.000) (0.000)
Pseudo R2 0.005 0.015 0.011 0.039 0.069 0.039
10-day FEs Yes Yes Yes Yes Yes Yes
Prior-to-article FEs Yes Yes Yes Yes Yes Yes
Multiple-article FEs Yes Yes Yes Yes Yes Yes
Industry FEs No No No Yes Yes Yes
Observations 83,855 83,855 83,855 83,855 83,855 83,855
This table explores the relation on insider purchasing activity after the publication of fear articles. We compare
corporate insider purchases from the day the first deterrence article was published until day -2 (where day 0 refers
to the day of the bid announcement) in relation to purchasing activity before the publication of the deterrence
articles, and with merger deals without any published fear article before their announcements. We use three
variables as our dependent variable in order to ensure the robustness of our findings: the daily number of
purchases, the sum of percentage of the shares purchased, and the sum of the value of the purchases in $. The
interval to measure corporate insider purchases is based on trading days prior to each merger announcement. We
use Poisson regressions across the study since this approach deals with count data. The main independent variable
under consideration is the fear article. “Fear article” is a dummy variable that takes the value of one from the day
the deterrence article was published (from day -90 onwards) until day -2. If more than one deterrence article was
published prior to a particular merger announcement, we consider the day the first fear article is published until
day -2. We add dummies to control for the additional fear articles published before merger announcements. P-
values are shown in parentheses. ** and *** indicate statistical significance at the five and one percent levels,
respectively.
31
Table 3 Insider purchasing activity after the publication of fear articles: Potential pleasure versus potential pain
#
purchases
#
purchases
sum %
equity
sum value
purchases
#
purchases
#
purchases
sum %
equity
sum value
purchases
#
purchases
#
purchases
sum %
equity
sum value
purchases
(1) (2) (3) (4) (5) (6) (7) (8) (9) (10) (11) (12)
Fear article -1.355*** -2.430*** -1.448*** -8.636*** -9.564*** -4.454*** -0.228 -1.062*** -0.345***
(0.000) (0.000) (0.000) (0.000) (0.000) (0.000) (0.105) (0.000) (0.000)
Fear article * CAR>0 0.287*** 0.462*** 0.293***
(0.000) (0.000) (0.000)
Fear article *# investigations 1.460*** 1.569*** 0.708***
(0.000) (0.000) (0.000)
Fear article* Small size targets -0.721** -0.410 -1.097***
(0.013) (0.229) (0.000)
CAR>0 0.171*** 0.104*** 0.103*** 0.051***
(0.000) (0.001) (0.006) (0.000)
# investigations -0.792*** -1.328*** -1.660*** -1.122***
(0.000) (0.000) (0.000) (0.000)
Small size targets 0.408*** 0.531*** 0.419** 0.436***
(0.003) (0.000) (0.015) (0.000)
Constant -3.794*** -3.555*** -2.358*** -1.545*** 1.134 4.239*** 7.158*** 4.816*** -6.459*** -6.397*** -3.492*** -2.722***
(0.000) (0.000) (0.000) (0.000) (0.111) (0.000) (0.000) (0.000) (0.000) (0.000) (0.000) (0.000)
Pseudo R2 0.041 0.044 0.076 0.043 0.041 0.045 0.077 0.045 0.122 0.124 0.161 0.100
Previous controls and FEs Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes
Observations 83,855 83,855 83,855 83,855 83,855 83,855 83,855 83,855 38,377 38,377 38,377 38,377
This table explores the strength of the relation in association with insider potential pleasure versus pain. We explore the significance of the cumulative target stock returns in
the interval period between -60 and +1 at columns 1 to 4, the significance of the number of formal investigations by the SEC at columns 5 to 8, and the significance of the size
of the target firms at columns 9 to 12. The CAR variable is defined as the natural logarithm of one plus CAR(-60,+1) for positive CAR(-60,+1), and zero otherwise. The #
investigation variable is defined as the natural logarithm of the number of formal investigations in the year of the announcement. We define as small size targets (a dummy
variable), firms with a market capitalization less than $100 million. P-values are shown in parentheses. *** indicates statistical significance at the one percent level.
32
Table 4 Insider purchasing activity after the publication of fear articles: Article visibility and the severity of the perceived risk
# purchases sum %
equity
sum value
purchases
# purchases sum %
equity
sum value
purchases
# purchases sum %
equity
sum value
purchases
(1) (2) (3) (4) (5) (6) (7) (8) (9)
Length -0.060*** -0.127*** -0.077***
(0.000) (0.000) (0.000)
Fear article -0.326*** -0.610*** -0.426*** -0.202 -0.401** -0.122**
(0.001) (0.000) (0.000) (0.126) (0.014) (0.037)
Front page -0.458** -1.326*** -0.464***
(0.011) (0.000) (0.000)
Severity group 2 -0.145 -0.495*** -0.464***
(0.275) (0.004) (0.000)
Severity group 3 -0.437** -0.117 -0.200**
(0.011) (0.602) (0.012)
Constant -3.038*** -1.775*** -1.246*** -3.034*** -1.774*** -1.242*** -3.030*** -1.772*** -1.233***
(0.000) (0.000) (0.000) (0.000) (0.000) (0.000) (0.000) (0.000) (0.000)
Pseudo R2 0.039 0.069 0.039 0.039 0.072 0.040 0.040 0.070 0.041
Previous controls and FEs Yes Yes Yes Yes Yes Yes Yes Yes Yes
Observations 83,855 83,855 83,855 83,855 83,855 83,855 83,855 83,855 83,855
This table explores the relation in association with the article visibility and the severity of the perceived risk. We explore the significance of the length of the articles as shown
by the number of words used at columns 1 to 3, the significance of the publication of the articles at the first page of each section at the Wall Street Journal at columns 4 to 6,
and the significance of the severity of the terms used in the headline of each article at columns 7 to 9. Length is the natural logarithm of the number of words in the article.
Front page is a dummy variable that is equal to one if the article is on the first page of the main sections of WSJ, and zero otherwise. Articles with high severity are assigned to
a higher group (i.e., articles in Severity group 3 use more severe terms than articles assigned to Severity group 2). P-values are shown in parentheses. ** and *** indicate
statistical significance at the five and one percent levels, respectively.
33
Table 5 Insider purchasing activity after the publication of fear articles: The duration of the impact
# purchases sum % equity sum value purchases # purchases sum % equity sum value purchases
(1) (2) (3) (4) (5) (6)
Fear article -0.456*** -1.045*** -0.572***
(0.003) (0.000) (0.000)
Days since the article 0.760*** 0.114 0.441***
(0.000) (0.577) (0.000)
Constant -4.120*** -2.542*** -2.930*** -38.079 -35.104 -20.184
(0.000) (0.001) (0.000) (0.987) (0.989) (0.983)
Pseudo R2 0.059 0.146 0.064 0.156 0.145 0.114
Controls, Industry, 10-day FEs Yes Yes Yes Yes Yes Yes
Observations 27,431 27,431 27,431 14,319 14,319 14,319
# purchases sum % equity sum value purchases # purchases sum % equity sum value purchases
(7) (8) (9) (10) (11) (12)
Fear article (date +5) -0.223 -0.831*** -0.342***
(0.146) (0.000) (0.000)
Fear article (date +10) 0.063 -0.509** -0.033
(0.686) (0.026) (0.678)
Constant -4.191*** -2.612*** -3.014*** -4.251*** -2.690*** -3.096***
(0.000) (0.001) (0.000) (0.000) (0.001) (0.000)
Pseudo R2 0.057 0.141 0.061 0.056 0.137 0.059
Controls, Industry, 10-day FEs Yes Yes Yes Yes Yes Yes
Observations 27,431 27,431 27,431 27,431 27,431 27,431
This table explores the duration of the relation. We use in this table merger deals with one fear article only. We explore the significance of the main relation at columns 1 to 3.
Columns 4 to 6 test the significance of the relation in association on which day the purchasing activity takes place in relation to the publication of the fear articles. Columns 7
to 12 test the magnitude of the relation when excluding the first five or ten days after each fear article published. P-values are shown in parentheses. * and *** indicate statistical
significance at the ten and one percent levels, respectively.
34
Table 6 Insider purchasing activity after the publication of fear articles: Risk perception versus informational channels (real risks)
#
purchases
sum %
equity
sum value
purchases
#
purchases
sum %
equity
sum value
purchases
#
purchases
sum %
equity
sum value
purchases
(1) (2) (3) (4) (5) (6) (7) (8) (9)
Fear article -0.400*** -0.759*** -0.496*** -0.367*** -0.631*** -0.463***
(0.000) (0.000) (0.000) (0.000) (0.000) (0.000)
Length -0.060*** -0.126*** -0.078***
(0.000) (0.000) (0.000)
Front page -0.248 -1.192*** -0.265***
(0.183) (0.001) (0.003)
SEC tightening article -0.593*** -0.643*** -0.635*** -0.584*** -0.631*** -0.623*** -0.545*** -0.505*** -0.584***
(0.000) (0.001) (0.000) (0.000) (0.001) (0.000) (0.000) (0.009) (0.000)
Constant -3.081*** -1.856*** -1.287*** -3.082*** -1.854*** -1.288*** -3.076*** -1.834*** -1.281***
(0.000) (0.000) (0.000) (0.000) (0.000) (0.000) (0.000) (0.000) (0.000)
Pseudo R2 0.041 0.071 0.041 0.041 0.071 0.041 0.041 0.073 0.042
Previous controls and FEs Yes Yes Yes Yes Yes Yes Yes Yes Yes
Observations 83,855 83,855 83,855 83,855 83,855 83,855 83,855 83,855 83,855
This table explores the strength of the relation after considering for real litigation/reputation risks. We explore the significance of the main results at columns 1 to 3 and the
significance of the length of the articles at columns 4 to 6, and the significance of the front page of the articles at columns 7 to 9. Length is the natural logarithm of the number
of words in the article. Front page is a dummy variable that is equal to one if the article is on the first page of the main sections of WSJ, and zero otherwise. The “SEC tightening
article” is a dummy variable that takes the value of one if there is any article indicating a change in SEC enforcement articles prior to or on that day. P-values are shown in
parentheses. *, ** and *** indicate statistical significance at the ten, five and one percent levels, respectively.
35
Table 7 Insider purchasing activity after the publication of fear articles: Robustness tests
# purchases sum % equity sum value purchases # purchases sum % equity sum value purchases
Tobit Tobit Tobit Panel Panel Panel
(1) (2) (3) (4) (5) (6)
Fear article -0.004* -0.005*** -0.025*** -0.005** -0.006*** -0.035***
(0.056) (0.000) (0.001) (0.030) (0.000) (0.000)
Constant 0.030*** 0.037*** 0.165*** 0.014*** 0.011*** 0.072***
(0.000) (0.000) (0.000) (0.000) (0.000) (0.000)
var(e.count_trades_A) 0.055***
(0.000)
var(e.ln_sum_trades_A) 0.020***
(0.000)
var(e.ln_sum_trades_val_A) 0.592***
(0.000)
R2 0.073 0.085 0.068
Pseudo R2 -0.016 -0.002 0.001
Previous controls and FEs Yes Yes Yes
Deal FEs Yes Yes Yes
Observations 83,855 83,855 83,855 48,653 48,653 48,653
# purchases sum % equity sum value purchases # purchases sum % equity sum value purchases
Poisson Poisson Poisson OLS OLS OLS
(7) (8) (9) (10) (11) (12)
Fear article -0.217** -0.804*** -0.421*** -0.021 -0.037*** -0.172***
(0.036) (0.000) (0.000) (0.249) (0.001) (0.004)
Constant -0.674** 1.084*** 1.431*** 0.274*** 0.300*** 1.477***
(0.022) (0.004) (0.000) (0.000) (0.000) (0.000)
R2 0.012 0.026 0.015
Pseudo R2 0.059 0.120 0.050
Previous controls and FEs Yes Yes Yes Yes Yes Yes
Observations 11,366 11,366 11,366 11,366 11,366 11,366
36
Table 7 – continued
# purchases sum % equity sum value purchases sum % equity (quintile) sum value purchases (quintile)
Zero-inflated negative binomial
(13) (14) (15) (16) (17)
Fear article -0.165 -0.817*** -0.111*** -0.369*** -0.355***
(0.401) (0.000) (0.002) (0.000) (0.003)
Constant -2.429*** -1.396*** 2.146*** 2.072*** 0.755***
(0.000) (0.008) (0.000) (0.000) (0.005)
Constant (inflate) 0.934*** -15.004*** 5.452*** 5.292*** 5.330***
(0.007) (0.000) (0.000) (0.000) (0.000)
Lnalpha 4.577*** 4.413*** -18.262*** -18.000*** -1.28e+05***
(0.000) (0.000) (0.000) (0.000) (0.000)
Previous controls and FEs Yes Yes Yes Yes Yes
Log lik. -3459.548 -2790.985 -3950.497 -3608.976 -3653.948
Chi-squared 198.378 262.134 171.022 312.432 145.187
Prob.>Chi2 0.000 0.000 0.000 0.000 0.000
Observations 83,855 83,855 83,855 83,855 83,855
# purchases sum % equity sum value purchases
Non-routine purchases
(18) (19) (20)
Fear article -0.605*** -0.876*** -0.633***
(0.000) (0.000) (0.000)
Constant -3.408*** -1.813*** -1.378***
(0.000) (0.000) (0.000)
Pseudo R2 0.050 0.074 0.044
Previous controls and FEs Yes Yes Yes
Observations 83,855 83,855 83,855
37
Table 7 – continued
sum % equity sum value purchases
Individuals purchases
(21) (22)
Fear article -1.458*** -1.624***
(0.000) (0.000)
Constant 7.365*** 8.909***
(0.000) (0.000)
R2 0.445 0.311
Previous controls and Fes Yes Yes
Observations 662 662
This table explores the robustness of the relation. We test alternate methodological estimations at columns 1 to 17. We only test the relation for non-routine purchases at columns
18 to 20. Finally, we test the relation for individual purchases at columns 21 and 22. P-values are shown in parentheses. ** and *** indicate statistical significance at the five
and one percent levels, respectively.
38
Table 8 Placebo testing
# purchases sum % equity sum value purchases
(1) (2) (3)
Alternative window [-270,-180]
Fear article -0.056 0.248*** -0.038
(0.280) (0.000) (0.102)
Constant -4.099*** -2.178*** -1.044***
(0.000) (0.000) (0.000)
R2
Pseudo R2 0.047 0.087 0.044
Previous controls and FEs Yes Yes Yes
Observations 80,050 80,050 80,050
This table undertakes a placebo testing as shown at columns 1 to 3 by using the interval period between -270 and -180 in order to test the main relation. P-values are shown in
parentheses. *, ** and *** indicate statistical significance at the ten, five and one percent levels, respectively.
39
Figure 1 Number of corporate insider purchases prior to merger announcements
40
Figure 2 Abnormal stock returns for target firms in relation to the day of merger
announcements
Figure 3 Regression coefficients of daily variables since the publication of a deterrence
article
41
Figure 4 Time trends of articles, enforcement actions and insider purchases