Information Spillovers Prior to M&A Announcements

In this paper, I study trading activities prior to M&A announcements pertaining to the rivals of the merging firms. I find that not only acquirers and targets experience increases in abnormal trading activities in stock and option markets, but also their rivals. The rise in option trading is especially strong for options that informed traders are most likely to trade. I find that the implied volatility spread (IV spread) constructed from a rival’s option prices the day before the announcement can predict this rival’s cumulative abnormal return (CAR) over the M&A announcement window. As the IV spread is widely adopted as a proxy for informed trading activities in the option market, my findings provide evidence for information spillovers from merging firms to their rivals prior to the announcements of the M&A deals.