Essays on the insider role of M and A advisors and the relationship between product similarity and corporate cash holdings

  • Huixin Zhang

Student thesis: Phd


This thesis presents three essays, with the first two focusing on the insider role of M and A advisors and the effectiveness of insider trading rule, while the third essay looks into the effects of product market competition on corporate cash holdings.The main hypothesis of the first and second essay is that the advisory banks that are privy to non-public deal information might have high motivation to exploit this privileged information by taking a position in a takeover target ahead of a deal and realise an excess return upon deal announcement. This motivation for and act of "insider trading" might be attenuated by the insider trading rules Rule10b5-1 and Rule10b5-2, which were released in 2000.The first essay examines the presence of acquiror advisors' holdings in targets and their trading strategy on such holdings before deal announcement. Using an aggregate level of stake-holding in the target firm by a financial conglomerate/brands with which the advisor to the acquiror is affiliated, we find that advisory brands start to take and accumulate holdings in targets at least seven quarters before deal announcement through to announcement quarter. The stake-holding is significantly larger than that of a non-advisory brand group that is defined. We argue that these results imply the direct link between advisory holdings, advisor identity and the strong intentions of trading on private deal information. However, this tendency is markedly attenuated in the post-rule period after 2000. This change in advisory brand trading strategy on target stocks ahead of a deal with the passage of rules suggests a positive deterrence effect of the insider trading rule.In the second essay, we investigate the profitability of this trading strategy by advisory brands to acquirors taking stake in targets ahead of a deal. Results suggest that both the level and the build-up (increase) of an advisory stake between the last two quarters immediately preceding deal announcement are positively related to the target return. These results are consistent with the view that advisory brands trade on their privileged deal information by taking and increasing holdings in targets ahead of deals to profit from the increase in target share price. In our sub-period analysis, results suggest that all the coefficients become much smaller and insignificant for the post-rule period after 2000. This again indicates a strongly positive deterrent effect of regulation, which further confirms the conclusion of the first essay.The third essay is related to both the static and dynamic effect of product market competition on firm cash holdings. We find that the intensity of product market competition measured by product similarity from Hoberg and Phillips (2010, 2011) has a significant positive effect on firm cash holdings, after controlling for other measures including the Industry Herfindahl Index and industry fluidity. This suggests that firms in a more competitive industry reserve more cash as their war chest or preemptive tool against competitors. Further, Vector Autoregression (VAR) and analyses of shock show that when there is a sudden increase in product similarity/competition level (shock), firms use cash to fight off competition, leading to a decrease in cash holdings.
Date of Award1 Aug 2015
Original languageEnglish
Awarding Institution
  • The University of Manchester
SupervisorNicholas Collett (Supervisor)


  • M and A advisor
  • Insider trading
  • product market competition
  • corporate cash holdings

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