Institutional trading around M&A announcements

Abstract

We contrast the investment strategies of hedge funds and mutual funds around mergers and acquisitions (M&A). We find that hedge funds, on average, increase their holdings of soon-to-be takeover targets by 7.5% during the quarter before M&A announcements. Conversely, mutual funds, on average, reduce their equity holdings in impending targets by 3.0% over the same time period. The reduction in M&A holdings by mutual funds is less pronounced for more actively managed funds. Our results suggest that hedge funds enjoy superior access to private information or possess superior ability to process public information related to M&A transactions.