Insider trading in the run-up to merger announcements. Before and after the UK's Financial Services Act 2012

TL;DR

This study evaluates the impact of the UK's Financial Services Act 2012 on insider trading regulation effectiveness by analyzing abnormal stock returns before merger announcements, finding improved regulation post-2012.

Contribution

It provides empirical evidence that the FCA's regulation post-2012 reduces abnormal returns and noise in stock prices related to insider trading around merger announcements.

Findings

Abnormal returns decreased after 2012 regulation implementation.

Stock prices became less noisy post-2012.

Insignificant abnormal returns observed in 2015-2019 period.

Abstract

After the 2007/2008 financial crisis, the UK government decided that a change in regulation was required to amend the poor control of financial markets. The Financial Services Act 2012 was developed as a result in order to give more control and authority to the regulators of financial markets. Thus, the Financial Conduct Authority (FCA) succeeded the Financial Services Authority (FSA). An area requiring an improvement in regulation was insider trading. Our study examines the effectiveness of the FCA in its duty of regulating insider trading through utilising the event study methodology to assess abnormal returns in the run-up to the first announcement of mergers. Samples of abnormal returns are examined on periods, under regulation either by the FSA or by the FCA. Practically, stock price data on the London Stock Exchange from 2008-2012 and 2015-2019 is investigated. The results from this study determine that abnormal returns are reduced after the implementation of the Financial Services Act 2012; prices are also found to be noisier in the period before the 2012 Act. Insignificant abnormal returns are found in the run-up to the first announcement of mergers in the 2015-2019 period. This concludes that the FCA is efficient in regulating insider trading.