Regulation of illegal insider trading before takeovers

Essay 1 investigates whether public trading information of U.S. targets can successfully predict the probability of SEC investigation of those targets. The results show that public information reliably differentiates targets into those that are more likely and less likely to be investigated by the SEC. While both measures of abnormal return and abnormal volume separate targets into SEC investigation targets and targets free from SEC investigations, it is measures of abnormal return that are more strongly and consistently linked to SEC probes. Further, it has been shown that targets associated with certain non-trading factors are more predisposed to being subjected to SEC investigation. Specifically, cross-border deals, takeovers with public bidders, NASDAQ-traded targets, and bigger deals are more likely to be investigated by the SEC.;Essay 2 investigates the relationship between pre-bid abnormal trading of U.S. targets and the regulatory infrastructure against illegal insider trading within countries of their bidders. The results show that when a U.S. target is acquired by a U.S. bidder, the U.S. target experiences fewer pre-bid information leakages than when it is acquired by a non-U.S. bidder. A U.S. target and a U.S. bidder both operate in the same regulatory infrastructure of prohibitive sanctions for informed trading and strict enforcement of insider trading laws. While sanctions for insider trading offenses in foreign countries are generally ineffective in preventing or reducing informed trading in U.S. targets pursued by bidders from those countries, enforcement cooperation agreements between the U.S. SEC and foreign regulators significantly reduce the incidence of pre-bid information leakages in internationally acquired U.S. targets. Also, the high degree of a bidder country's development and the establishment of an ADR program by a bidder prior to pursuing U.S. targets do not protect those targets from experiencing a high level of pre-bid informed trading.