1

Fear and media coverage: The case of insider trading in takeover targets

Mark Aleksanyan

Lecturer in Finance

University of Glasgow

Mark.Aleksanyan@glasgow.ac.uk

Jo Danbolt

Professor in Finance

University of Edinburgh

Jo.Danbolt@ed.ac.uk

Antonios Siganos

Senior Lecturer in Finance

University of Glasgow

Antonios.Siganos@glasgow.ac.uk

Betty (HT) Wu

Lecturer in Finance

University of Glasgow

Betty.Wu@glasgow.ac.uk

Abstract

We examine whether target corporate insiders are deterred from open market share purchases

in their own firms prior to merger announcements following news in the Wall Street Journal

referring to illegal trading in past mergers. We posit that the deterrence effect provoked by

these news articles results from enhanced perception of the litigation and reputation risks. We

find evidence of a significant negative effect of such articles on insider purchases. This effect

increases with the visibility and severity of the articles. We find the effect to be smaller when

trading is highly profitable, but to be greater when public enforcement is relatively weak.

Overall, our study shows a significant short-term negative relation between media deterrence

and profitable active trading by target insiders.

Keywords: Insider Trading; Deterrence; Media Coverage; Risk Perception; Takeover Targets

2

“One of the most effective brakes on crime is not the harshness of its punishment, but the

unerringness of punishment… The certainty of even a mild punishment will make a bigger

impression than the fear of a more awful one which is united to a hope of not being punished

at all.”

Cesare Beccaria (On Crimes and Punishments, 1764)

1. Introduction

This study examines whether target corporate insiders refrain from purchasing shares

of their own firms during the lead-up to the public announcement of a bid for the firm after

media coverage of news about illegal insider trading in past mergers. We posit that such media

news coverage may temporarily increase the insiders’ fear and anxiety of the litigation and

reputation risks associated with transacting in their own firm’s shares, resulting in a short-term

negative impact on their purchases. Fear and anxiety have been shown to reduce investors’

willingness to take risks by making them more pessimistic about future returns (e.g., Kaplanski

and Levy, 2010). Prior research in psychology finds that individuals tend to assess risk or

estimate probabilities by using heuristics (i.e., mental shortcuts), rather than all available

information. One such heuristic is to infer the frequency of an event from its availability, i.e.,

the ease with which concrete occurrences of the event come to mind (Tversky and Kahneman,

1973, 1974), which might be affected by the salience of the event that is specific to the local

context where the risk is estimated (Bordalo et al., 2012, 2013). Contextual factors such as

emotional affect, novelty, time proximity, or media coverage increase the salience of an event

(Dessaint and Matray, 2017).

Insider trading in takeover targets provides an ideal setting to study the effect of media

coverage on individuals’ perceived risk from wrongdoing. The trades that we study are

transactions reported to the U.S. Securities and Exchange Commission (SEC) by registered

corporate insiders. These trades are not illegal, unless they are based on private information.

However, Agrawal and Nasser (2012), argue that a substantial percentage of such trades are

opportunistic and based on material, non-public information. In addition, Cohen et al. (2012)

find that opportunistic insider trades are a significant predictor of SEC investigations and that

opportunistic trading decreases significantly following SEC insider trading enforcement,

consistent with the idea that opportunistic traders dampen their trading activity when the

potential costs of illegal trading increase. Collectively, these studies provide evidence that

insider trading tends to be informative and profitable, and insiders have knowledge of the

3

litigation risk as well as potentially more severe reputation damages from their transactions.1

We focus on trading by insiders in takeover targets because being acquired is a major event for

target firms. This might provide a tempting trading opportunity for corporate insiders who are

often aware of takeover negotiations prior to the announcement.2 Studies such as Agrawal and

Nasser (2012) and Agrawal and Cooper (2015) find that target corporate insiders reduce their

purchases while increasing their net purchases by reducing sales, again suggesting that they are

aware of the forthcoming mergers and the risks entailed.

We hypothesise that the publication of news articles referring to illegal insider trading

around past mergers will have a significant short-term negative impact on the level of share

purchase activity by target company insiders in the lead up to the public bid announcement for

their firms. While the articles, which we will refer to interchangeably as “fear” or “deterrence”

articles, relate to illegal trading in past mergers rather than to the forthcoming bids or to the

insiders we study themselves, we posit hat such articles may raise the level of fear of insiders

from trading based on their inside information, and therefore deter them from trading in the

run-up to merger announcements.

Our hypothesis is motivated by the Classic Deterrence Theory (CDT) from the field of

criminology. This theory maintains that humans decide whether to undertake an illegal activity

based on expected pleasure and pain (Zimring and Hawkins, 1973; Andenaes, 1974). It predicts

that the fear of sanctions or punishment would deter rational actors from engaging in a

potentially illegal activity (Paternoster, 2010). As the quote at the beginning suggests, to

prevent wrongdoing, it would be more effective to increase the likelihood than the harshness

of its punishment. Indeed, Cohen et al. (2012) find that opportunistic traders reduce trading

following waves of SEC insider trading enforcement, and Del Guercio et al. (2017) report that

aggressive SEC enforcement deters illegal insider trading activity. In a similar vein, we argue

that media coverage can achieve that by altering some insiders’ perceived risk – but not

necessarily the real risk – of being caught or investigated by the SEC. Exposure to news of past

1 The SEC issued on average around 40 insider trading related enforcement actions per year during 2005-2015.

Approximately a third of the defendants in these actions were top corporate insiders, current or former board

directors or executive officer (Anand et al., 2018). The consequences to insiders of getting caught or even simply

being investigated by the SEC may vary from losing their jobs and potential loss of reputational capital, to civil

and criminal penalties under insider trading laws (see e.g., Agrawal and Nasser (2012) for a discussion). 2 A number of studies (e.g., Jarrell and Poulsen, 1989; Pound and Zeckhauser, 1990; Morgenson, 2006; King,

2009) show that stock returns of target firms usually increase significantly, from as early as 30 days prior to

merger announcements. Thus, corporate insiders, if aware of forthcoming bids for their firms, could make

substantial gains from buying shares of their own firms during the stock price run-up period.

4

insider trading violations3 will remind insiders of the risks4 and may affect their fear of being

caught. If so, their subjective probability of litigation and/or reputation risk can be expected to

rise temporarily. Prior literature on media coverage has examined the role and impact of media

on market sentiment (e.g. Tetlock, 2007; Fang and Peress, 2009), investor attention (e.g.,

Barber and Odean, 2008), corporate governance (Liu et al., 2017), and information

dissemination (e.g., Dai et al., 2015; Rogers et al., 2016). We contribute to this literature by

documenting the influence of media, as a risk perception channel, on target corporate insiders’

trading behavior.

Our main finding is that these news articles have a significant negative effect on insider

purchases. This relation remains robust in various tests. We find that the negative effect is

weaker when trading is highly profitable (when the temptation to trade, despite the risk, would

be higher), but to be stronger in times of weak public enforcement of insider trading

regulations. These results are consistent with our Classic Deterrence Theory-based cost-benefit

trade-off hypothesis.

Furthermore, this negative relation increases with the visibility and severity of the

articles, in line with salience theories of choice. These effects are temporary and seem to

disappear in a couple of weeks, which is consistent with our premise that insiders’ response is

not entirely rational in nature, but rather is triggered by elevated anxiety and perception of risk.

However, we do not find a reversal effect which is typically seen in behavioral finance studies

suggesting that it may take longer for some insiders to completely ‘forget’ their anxiety, if they

are exposed to more salient news for example. Overall, our study shows the significance of

media deterrence on profitable active trading by target insiders through the risk perception

channel.

Two papers that similarly explore the significance of the media on corporate insiders’

transactions (i.e., the information dissemination channel), are Rogers et al. (2016) and Dai et

al. (2015). Rogers et al. (2016) find that when media covers filings of insiders’ trades, stock

returns adjust rapidly to their dealings, indicating that the impact of insider transactions are

more apparent in the market when covered by the media. Closer to our study, Dai et al. (2015)

3 Tetlock (2011) finds evidence that individual investors overreact to stale information, leading to temporary

movements in firms’ stock prices. In a similar vein, while the news in fear articles relates to insider trading

violations in past mergers, we posit that they will affect current behavior of insiders. 4 The availability heuristic derives from the experience that frequent events are much easier to recall or imagine

than infrequent ones. Consequently, when assessing the probability of an event, most people evaluate how easy it

is to imagine an example of a situation in which this event actually occurred.

5

find that when media covers past transactions by corporate insiders, corporate insiders on

average reduce the level of strategic timing of their later transactions, with the profitability of

their trades after the initial media coverage significantly lower. In contrast to Dai et al. (2015),

in our study, the media coverage is not directly linked to insiders themselves, but concerns

illegal insider trading by others in past mergers. The initial source of information for the article

may vary significantly, coming e.g., from the SEC, court cases, firms under investigation,

rumors, or simply based on the interest of the Wall Street Journal to cover a relevant topic over

time. This may raise questions as to whether the relation we observe is a result of the

publication per se, or whether deterrence articles might forebode greater enforcement in the

future. We do not find that these news articles foretell subsequent increases in the number of

enforcement actions, even though this is likely what insiders believe when they re-assess the

risk-return trade-offs of trading after the publication of the articles. If anything, insider trades

seem to respond to SEC investigations more than prosecuted cases,5 indicating the reputation

risk to be an important factor in the potential costs of illegal insider trading. To our knowledge,

this paper is the first to show that the media has a deterrence effect on profitable active trading

by target corporate insiders, especially when formal enforcement is not strong.

The remainder of the paper is structured as follows. Section 2 reviews relevant

literature. Section 3 discusses the data and methodology used. Section 4 reports the empirical

results of this study, and the final section concludes this study.

2. Relevant literature and theory

Our hypothesis builds upon three premises: (1) that registered insiders have to report

their stock trades to the SEC and they are aware that these trades may come under SEC’s

scrutiny; (2) the premise of the Classic Deterrence Theory, that a rational individual would be

deterred from engaging in a potentially incriminatory activity when the perceived risk or

severity of potential punishment outweighs the reward; and (3) the finding from the field of

investor psychology that media attention to negative events may provoke investors’ anxiety

and fear, and temporarily reduces their willingness to take risks (e.g., Kaplanski and Levy,

2010). Below we explicate how these premises constitute necessary and sufficient conditions

for our conjectured effect.

5 This result is consistent with the findings in Del Guercio et al. (2017).

6

2.1 Are corporate insiders’ transactions opportunistic?

The first premise for our hypothesis is that that registered insiders have to report their

stock trades to the SEC and they are aware that these trades may come under SEC’s scrutiny.

Section 16a of the Securities Exchange Act of 1934 requires registered corporate insiders to

provide public disclosure about their stock trading to the SEC. Their trading would be deemed

illegal (and prohibited under SEC Rule 10b-5) if it is based on material non-public information.

It is the SEC’s remit to scrutinize the registered insiders’ transactions and to prove an illegal

activity for a prosecution to take place. Events such as merger announcements are particularly

conducive to SEC’s scrutinizing of corporate insiders’ prior transactions due to their likely

information advantage and the magnitude of potential gains from opportunistically acting upon

this information. Indeed, corporate insiders are typically considered to be aware of the

forthcoming mergers (Agrawal and Nasser, 2012), and there is well established evidence of

significant target price run-ups prior to merger announcements, with excess stock returns

reaching, on average, 30% upon announcement (e.g., Jarrell and Poulsen, 1989; Pound and

Zeckhauser, 1990; Morgenson, 2006; King, 2009).

In addition, a number of prior studies of managers’ transactions offer evidence to

suggest that the transactions of some corporate insiders are opportunistic. Cohen et al. (2012)

and Hong et al. (2018) report a significant relation between corporate insiders’ purchases /

sales and next period stock performance, indicating that some insiders trade to their own

benefit. Agrawal and Cooper (2015) explore managers’ transactions prior to accounting

scandals, and find that managers tend to sell shares in firms that needed to undertake important

restatements. Kallunki et al. (2018) explore the insider characteristics in relation to the

likelihood of them to transact based on their private information, and find less wealthy insiders

are more likely to sell prior to significant decreases in stock returns of their firms. Agrawal and

Nasser (2012) report that some corporate insiders reduce their purchases prior to merger

announcements in response to potential scrutiny they may receive from the SEC. However,

they simultaneously reduce their sales more profoundly, generating net gains from the

difference between purchases and sales.

The literature thus suggests that at least some corporate insiders may be tempted to

exploit their information advantage over other investors to their own advantage. In this paper,

7

we build on the prior literature on opportunistic trading by insiders and explore whether

deterrence articles influence their behavior prior to acquisition announcements.

2.2 Deterrence theory and managers’ decisions

Regulators aim to make markets fair, and they are keen on preventing corporate insiders

from abusing their inside information. For this reason, strict rules are present to restrict the

scope for opportunistic transactions. Trading on the basis of material inside information is

illegal, and it is natural to base our theory on work in the field of criminology. In particular,

the Classic Deterrence Theory (CDT) suggests that rational individuals decide whether to

undertake a criminal activity based on expected pleasure and pain (e.g., Zimring and Hawkins,

1973; Andenaes, 1974). Based on this theory, corporate insiders should weigh the

attractiveness of potentially large financial gains from buying shares prior to merger

announcements against the probability of getting caught and the severity of any punishment if

found guilty of illegal insider trading. The “broken windows” concept developed by Wilson

and Kelling (1982) also supports the deterrence logic, according to which the lack of law

enforcement leads individuals to think that they are less likely to be arrested, and thus the

presence of broken windows may make individuals more likely to continue to vandalize, while

the presence of non-broken windows deters them from breaking any new windows, as the

perceived threat of getting caught is higher. According to the CDT, the determination of

expected risks may be the outcome of rational and/or irrational responses to available

information that may vary amongst individuals, in line with their risk preferences and ability

to assimilate and understand information. Deterrence is indeed an established method in

criminology to prevent crime through the perception of potential consequences of one’s

activities.6

The CDT conditions the effectiveness of deterrence on individuals’ awareness that their

actions are wrong, and that there are potential consequences for their actions. These conditions

are met within the context of our study. The SEC has been responsible for regulating insider

trading since the 1934 Securities Act, and Rule 10b-5 is used to implement Section 10(b) of

the 1934 Act to determine unlawful actions by insiders. 7 Punishment for insider trading

6 See Nagin (1998) for a comprehensive review of this field. 7 In civil matters, Congress has granted the SEC authority to order the disgorgement of the illegal profits made or

losses avoided as a result of the illegal transaction plus penalties of up to three times the illegal profits. The SEC

can also suspend or permanently bar violators from serving as corporate directors or as broker-dealers through an

administrative proceeding (Del Guercio et al., 2017).

8

violations can be severe, such as the sentencing to 11 years in prison of Raj Rajaratnam in the

Galleon case in 2011.8 In 2000, the SEC adopted the misappropriation theory of insider trading

that expanded the scope of events and individuals that fall within the ambit of Section 10(b)

and Rule 10b-5, to include persons outside the firm (e.g., a relative, friend, investment banker,

lawyer). Under the misappropriation theory outside persons commit fraud when they

misappropriate material non-public information for securities trading purposes. 9 Indeed, a

number of such outsiders have also been caught after trading on inside information received

from a corporate insider prior to acquisitions. However, except for a relatively small number

of cases where successful prosecution cases have been brought against outsiders, there is no

record of who, external to the firm, may have been trading on the basis of inside information

that was passed on to them. In this study, we are therefore restricted to analyse corporate

insiders’ transactions in their own shares, due to data availability.

Therefore, as the second premise for our hypothesis, the insiders’ incentives to engage

in (legal or illegal) trading prior to merger announcements would be attenuated, at least to some

extent, by their perceived likelihood of them falling under the SEC’s scrutiny. The CDT

predicts that rational actors would be deterred from engaging in a potentially illegal activity for

fear of sanctions or punishment (Paternoster, 2010). To the extent that corporate insiders act

rationally when contemplating trades, they face a trade-off between abnormal financial gains

and anxiety/perceived risk. We posit that anxiety and perceived risk can affect both legal and

illegal trades by insiders. With respect to legal trades, the effect would transpire through

corporate insiders’ anxiety of drawing the SEC’s unwanted attention, and/or a possible

reputational damage if such attention ‘leaks out’. On the other hand, with respect to illegal

trades, the effect would be that of the fear of being caught and punished.

2.3 The impact of media coverage on individuals’ trading behavior

A third premise for our hypothesis is that media attention to negative events may

provoke investors’ anxiety and fear, and temporarily reduces their willingness to take risks.

Prior literature shows that media is an important determinant of investors’ decisions, and

studies such as Tetlock (2007), Fang and Peress (2009), and Loughran and McDonald (2011)

document a positive relationship between the tone of the published newspaper articles and the

8 See: https://www.reuters.com/article/us-galleon-rajaratnam/rajaratnam-gets-11-year-prison-sentence-

idUSTRE79C0MC20111013. [Last accessed 31 December 2018]. 9 See: https://www.sec.gov/rules/final/33-7881.htm. [Last accessed 31 December 2018].

9

stock market returns. Kaplanski and Levy (2010) show that news of negative events can elevate

investors’ general anxiety and fear, changing their risk perception and affecting their trading

behavior. Importantly, the authors document the influence of events (e.g., aviation disasters)

that have no direct relevance to investors’ incentives, neither to the performance of firms that

they invest in. If news about events that are not directly relevant to investors’ context have the

potential to elevate their anxiety and risk perception (and affect their trading), then the media

news that are directly pertinent to a specific group of investors (e.g., corporate insiders) and a

specific context (e.g., before merger announcement of their firms) are bound to be impactful.

To this end, we use the context of target firms before the merger announcement and news

articles that specifically relate to illegal insider trading in past mergers. We argue that articles

published in the Wall Street Journal that cover illegal insider trading activity in past

acquisitions can be expected to influence insiders’ perception of the risk involved in purchasing

shares in their own firm prior to forthcoming acquisition announcements.

Similar to our study, Dai et al. (2015) also explored the significance of media on

corporate insiders’ transactions. They find that when media covers past transactions by

corporate insiders, corporate insiders on average reduce the level of strategic timing of their

later transactions. They also show that the initial media coverage reduces the insiders’

subsequent transactions.

No study to our knowledge has tested whether media coverage can change corporate

insiders’ perception of the risk (e.g., anxiety and fear of SEC scrutiny) of their transactions.

Drawing on arguments presented above, we posit that media coverage of an illegal activity in

past mergers can influence insiders’ perceptions of the risk-return trade-off when

contemplating trades before the announcement of their firms’ merger deals.

Dessaint and Matray (2017) use hurricane events and show that managers overreact to

salient risks associated with the availability heuristic. Specifically, the authors find that the

sudden shock to the perceived liquidity risk leads managers to temporarily increase corporate

cash holdings and express more concerns about the hurricane risk in financial reports, even

though the actual risk remains unchanged. Such a discrepancy between perceived and actual

risk can be affected by factors such as salience of the event, and/or its proximity that are

unrelated to actual frequency. In our setup, when an article is published or has been recently

observed, the availability of litigations and reputation damages is high and its probability is

overestimated. On the other hand, in times without articles, these infrequent events are less

available and their probability is underestimated. If media coverage affects the perceived risk

10

of SEC scrutiny and potential punishment, and therefore the pleasure vs pain trade-off,

publication of these articles can be expected to temporarily deter some corporate insiders from

trading prior to acquisitions.

3. Data and methodology

3.1 Datasets used

To test our predictions, we collect data from several sources. We obtain our initial

sample of target firms in US public-to-public merger deals announced from SDC Thomson

OneBanker10 and match these target firms with their corporate insiders’ purchases from the

Thomson Reuters insiders filing database11 via the CUSIP code.12 In addition, we use the

Centre for Research in Security Prices (CRSP) and Compustat databases to collect stock return

data and balance sheet data for firm characteristics such as market-to-book ratio and historical

stock return that are used as control variables in our estimations. This leaves us with a sample

of 1,541 merger announcements between January 1996 and June 2014.

Our deterrence articles come from Factiva. In particular, we use Factiva to identify

articles published in the Wall Street Journal that refer to illegal transactions prior to past merger

announcements. As in other media studies (e.g., Tetlock, 2007; Fang and Peress, 2009; Ahern

and Sosyura, 2014), we base our study on articles published in the Wall Street Journal whose

circulation is the highest amongst US newspapers.13 We first collect all articles available with

the term “inside*” in the Wall Street Journal headline, where * indicates the letter(s), if any,

following the asterisk. We then study each of the headlines and the lead paragraph to identify

which of these articles refer to illegal transactions prior to US merger announcements. Note

10 Following the sample selection procedure commonly adopted in prior works (e.g., Agrawal and Nasser, 2012),

we require the deal value of each acquisition to be at least $1 million. In addition, we restrict our sample to

acquisitions of at least a 50% stake, and to transactions where the target company size is at least 1% of the market

value of the bidder. 11 We access corporate insiders’ purchases from the Thomson Reuters insiders filing database. In line with prior

literature (e.g. Cohen et al., 2012), we focus on Form 4 filings and select only open market stock transactions by

main corporate insiders (transaction code with “P”). We include stock transactions available from “Table 1” in

the insiders filing database. In line with Agrawal and Nasser (2012) and Dai et al. (2015), we drop transaction

code with “S” or “A”, while including transactions by “directors”, “officers” and “blockholders”. 12 The initial matching between the target firms and their corporate insiders’ transactions via the CUSIP code

results in deals from 1991. Applying the restriction of including purchases with transaction code “P” only results

in deals from 1993 onwards. The number of such purchases is very small before 1996 and therefore we exclude

deals before 1996. 13The printed circulation is around 2.4 million copies a day (as of March 2013) and currently 42.4 million online

users read news from the Wall Street Journal per month.

https://en.wikipedia.org/wiki/List_of_newspapers_in_the_United_States_by_circulation.

http://www.wsjmediakit.com/products/online.

11

that the selection of articles is manual rather than based on some simplifying algorithm, thus

minimising the level of noise in this measure.14

3.2 Dependent variable

We use three variables as our dependent variable in order to ensure the robustness of

our findings: the daily number of purchases by corporate insiders in target firms, the daily sum

of the percentage of equity purchased, and the daily sum of the value of the purchases in $.15

We examine corporate insiders’ purchases during the interval between 90 and 2 calendar days

prior to each merger announcement.16 To ensure that results are not driven by deterrence

articles published just before day -90 (where day 0 refers to the day of the bid announcement),

we only include mergers in our estimations without any deterrence article published in the

interval period between day -120 and -91. We stop at day -2 prior to each merger

announcement, since there is normally a significant increase in stock returns of target firms on

day -1 which is commonly considered part of the announcement returns.

In untabulated tests, we also use alternative intervals (from day -60 or day -120 until

day -2) and observe that our main results persist. However, this is no longer the case when the

interval is extended much beyond day -120 (e.g., when starting from day -300). This is as

expected, as corporate insiders are more likely to be influenced by deterrence articles that are

relatively close to the date of merger announcement. Target company insiders are unlikely to

be in possession of inside information about the forthcoming acquisitions this early. Even if

they were, it would arguably be more difficult for the SEC to prove. As shown in Figure 1, the

number of purchases in the 12 months prior to merger announcements begins to decline only a

few months before the announcements, with the most noticeable decline in the last 90 calendar

days or 60 trading days prior to the announcements. This would suggest that insiders tend to

gain awareness of the forthcoming acquisitions on average a few months before public

14 An example of such a news article in the Wall Street Journal has the following headline, “Feds Accuse P&G

Director – SEC Alleges Official Passed Insider Information on Berkshire’s Deal With Goldman”. It was published

in the cover page on 2 March 2011 and the Berkshire’s deal in question was during the financial crisis of 2008. 15 In this study, we focus on insides’ purchases rather than sales. Managers often sell shares on a regular basis,

and Agrawal and Nasser (2012) find that insiders may also take advantage of their private information by reducing

their normal levels of share sales prior to merger announcements. Unlike purchases, it is, however, much less

clear what impact fear articles will have, if any, on sales activity prior to merger announcement. For instance, if

insiders have an incentive to refrain from selling due to expected gains from forthcoming bids, fear articles may

have limited incremental impact on insiders’ propensity to sell. 16 We use trading days for regression analysis and we use calendar days for article-related variables. The cleaned

transaction dates from the Thomson Reuters insiders filing database are weekdays, although the as-reported

transaction dates can be over the weekend. We use the cleaned transaction dates for analysis.

12

announcements. The risk of SEC scrutiny is therefore expected to be higher if trading takes

place close to the bid announcement, and corporate insiders may not be influenced to the same

extent by the publication of a deterrence article if it arrives a long time before the merger

announcement.

[ please insert Figure 1 around here ]

While our data analysis reveals there to be a significant number of days with no

purchases by corporate insiders, we do not restrict our sample to mergers with purchases, since

this would results in look-ahead bias. Zero transactions are also meaningful for the purposes of

this study, since we argue that corporate insiders would be more hesitant about purchasing

shares after reading a deterrence article. If we had excluded mergers with zero purchases prior

to merger announcements, we would have in substance disregarded the underlying theoretical

link of our study.17 We use Poisson regressions for our main tests because this approach is most

commonly used when the dependent variable is based on count data. However, because of the

significant number of daily zero purchases, in additional tests we also use a number of

alternative estimation methods, including censored Tobit regressions, OLS, and zero-inflated

negative binomial (e.g., Cameron and Trivedi, 1998; Tobin, 1958). Our results are robust to

alternative estimation techniques.

3.3 Main independent variable

Our main independent variable is the first fear article published prior to each merger

announcement. As previously discussed, fear articles are identified from Factiva after searching

for articles that cover illegal activity prior to past merger announcements. “Fear article” is a

dummy variable that takes the value of one from the day the deterrence article was published

(from calendar day -90 onwards) until day -2 (where 0 is the merger announcement day). If

more than one deterrence article was published prior to a particular merger announcement, we

consider the day the first fear article was published until day -2. We add dummies to control

for the additional fear articles published before merger announcements.

In our sample, 903 of the mergers had at least one fear article published in the lead up

to the merger announcement, while 638 deals had no fear articles published prior to merger

announcements. Only 386 mergers had two or more fear articles published, with a maximum

17 Giglio and Shue (2014) show that the passage of time with no news is informative. In our study, the absence of

trading contains meaningful information.

13

of seven fear articles published before nine merger announcements. By construction of our fear

dummy, a larger proportion of mergers will have a fear article published during the pre-bid

period as we move closer to the merger announcement day. We find no pattern in the timing

of fear articles prior to merger announcements. There is no reason to expect that the deterrence

articles would appear more frequently during any period prior to merger announcements than

others, since they relate to past mergers and are thus exogenous to the forthcoming mergers.

However, to control for possible timing effects on our results, we include fixed effects for every

10 trading-day period prior to each merger announcement [i.e., (-60,-51), (-50,-41), etc.], as

discussed in section 3.4 on control variables below.

To test whether the publication of a deterrence article affects the level of insider trading

prior to merger announcement, we compare corporate insider purchases during the period from

the day the first deterrence article was published until day -2 in relation to the level of trading

before the publication of the deterrence articles, and with merger deals without any published

fear article before their announcements. We also include data from the period before each

publication of a fear article in order to capture the possible impact on insiders’ purchases from

potentially earlier sources of the information discussed in deterrence articles. Our main

hypothesis will be supported if the estimated coefficient on the “fear article” dummy is

significantly negative, which would indicate a reduction in the level of corporate insider

purchases from the day the deterrence article was published, onwards.

3.4 Control variables

We use a number of control variables that prior literature documents as potential

determinants of corporate insider transactions. We first control for whether there was a

takeover rumor for a particular target firm. To identify rumored merger deals, we download

articles from any source available from Factiva prior to each merger announcement that

includes the name of the target firm and any of the following terms: merg*, acqui*, target,

takeover, rumour*, rumor*, buyout, and bid* anywhere in the article, where * indicates any

letters (if any) following the asterisk. We study each individual article to ensure that it refers

to a potential merger of the particular target. We add a dummy for mergers with rumors to

control for corporate insiders who may transact more heavily based on their private information

when the public is aware of a forthcoming deal (Kyle, 1985).

14

We add 10-day fixed effects prior to each merger announcement [(-60,-51), (-50,-41),

etc.] in order to control for whether corporate insiders may be more hesitant to purchase shares

of their own firms close to the merger announcement, as transacting close to the merger

announcement may heighten the probability of SEC scrutiny (Agrawal and Nasser, 2012). We

include the target to bidder relative size ratio as a proxy of the significance of the forthcoming

merger deal. Corporate insiders are likely to be aware of the significance of the deal, and

relatively large mergers deals may be more likely to receive scrutiny by the SEC.

We also control for a number of firm characteristics. In particular, we control for target

firms’ market capitalization, market-to-book ratio, historical stock price return and standard

deviation of stock price returns. We also control for tender offers, since tender offers can be

hostile deals that could potentially take place without the managers of the target firms being

aware until very close to the merger announcement. We also add industry dummies as available

from SDC Thomson OneBanker. These are commonly used controls in the corporate insider

transactions literature in order to ensure that firm characteristics do not drive the relation (e.g.,

Agrawal and Nasser, 2012). We do not tabulate the parameter coefficients on industry, and 10-

day fixed effects for space consideration (results available upon request). Detailed variable

definitions are shown in the Appendix.

4. Empirical results

4.1 Univariate results

We first report the univariate results. Panel A of Table 1 shows the descriptive statistics

of the variables used in this study. Note the significant number of days without any purchases

by corporate insiders. As an example, the median daily number of purchases by corporate

insiders is zero. On days when purchases do occur, the mean value is $1,529, with a maximum

of $8,273,053.

[ please insert Table 1 around here ]

Panel B of Table 1 reports the average number of purchases per day during the 10

trading-days before and after the publication of fear articles (day 0). To ensure that there are

no overlaps, we only include mergers with one fear article published within 90 to 2 days prior

to the bid announcement. While we observe a small number of corporate insider purchases on

days 0 and +1, we find that there are no purchases on days +2 to +7 after the publication of a

deterrence article. Overall, these results offer the first indication that the publication of

15

deterrence articles seems to reduce purchasing by corporate insiders, in line with the developed

hypothesis.

Panel C of Table 1 provides the univariate mean test results of the significance of the

impact of published fear articles on purchasing activity by corporate insiders. In these tests, we

use the full period after the publication of a fear article until two days before each merger

announcement to estimate daily purchases. We conduct mean tests on the three variables of

insider purchases (i.e., the number of purchases, the percentage of outstanding equity acquired,

and the total value of shares bought) between mergers without any fear articles and mergers

with a fear article. In addition, we use deals with a fear article and conduct similar mean tests

on the same set of variables comparing the level of insiders’ purchases after versus before the

publication of the fear article. We find that on average the level of insider purchasing activity

in mergers with a fear article is significantly lower than that in mergers without a fear article.

We also find evidence of a significant reduction in purchases after the publication of deterrence

articles, in line with our hypothesis. For example, the average daily number of purchases is

0.0126 for mergers without any deterrence article, and 0.0088 with the publication of a

deterrence article. While the numbers are small, the difference in purchasing activity by the

corporate insiders between the two groups is statistically significant, with a p-value equal to

0.0307. Results are similar when looking at other variables of purchases and when comparing

insiders’ purchases after versus before the publication of a fear article. The impact of deterrence

articles on purchasing activity by the corporate insiders is non-trivial. While there are few

purchases overall, the reduction in trading after the publication of a deterrence article on

average exceeds 30%.

4.2 Multivariate results

In this section we present the main test results for the relation between media deterrence

and target company insiders’ share purchases prior to merger announcements, based on

multivariate estimations that control for a number potentially influential variables. Results are

reported in Table 2. We first estimate the relation without control variables for each of our

three dependent variables in columns 1 to 3, while in columns 4 to 6, the control variables are

included.

We find the parameter coefficient on the fear article to be negative and highly

significant, irrespective of whether we consider the impact on the number of purchases, the

16

number of shares purchased, or the value of shares purchased. The coefficient of -0.389 with a

p-value of 0.000 on the number of purchases, indicating the log of the expected number of

purchases is expected to decrease by 0.389 units, holding the other variables in the model

constant. Alternatively, the rate ratio for number of purchases is expected to decrease by a

factor of 0.678. The magnitude of the parameter coefficients are meaningful, considering the

relatively small number of purchases by corporate insiders on any given day during the period

leading up to merger announcements, as discussed earlier. These results thus support our main

hypothesis, indicating that corporate insiders on average undertake fewer purchases after the

publication of a fear article in comparison to what they do either before the relevant publication,

or in in relation to what they do prior to mergers where no fear article is published during the

lead up to the bid announcement.

[ please insert Table 2 around here ]

4.3 The mechanism behind the relation

We next explore the underlying mechanism that drives the relation between deterrence

articles and insider trading. In Section 2 we conjecture that insiders may be tempted to purchase

stocks of target firms prior to merger announcements in expectation of significant average stock

returns in the period leading up to and including the bid announcement, as shown in Figure 2.

However, not all targets see significant stock prices increase, and in untabulated results we find

that in almost 15% of the sample, there is no positive abnormal return over the interval period

between 60 trading days before to 1 day after the day of the bid announcement. If target

company insiders have information to help predict the stock market reaction to the forthcoming

bid announcement (e.g., from knowing the likely terms of the deal), insiders may be expected

to use this when deciding whether or not to trade. Our results are consistent with such a

conjecture, as shown in Table 3. Results in column 1 indicate that insiders are indeed

significantly more likely to purchase shares during the lead up to the bid announcement when

the cumulative abnormal stock returns of target firms from day -60 to day +1 are positive.

[ please insert Figure 2 and Table 3 around here ]

We also expect that the extent of insiders’ reaction to the publication of fear articles

would be related to the magnitude of the potential gain. Based on the pleasure versus pain

trade-off premise of the Classic Deterrence Theory, there should be relatively less response to

the publication of a deterrence article when insiders can expect significant gains. To test this,

17

we interact the cumulative abnormal returns for each deal in the period -60 and + 1 with the

fear articles. We find that the parameter coefficient on the fear article dummy remains

significantly negative, as shown in columns 2 to 4, but importantly, that the coefficient on the

interaction variable (fear * cumulative abnormal stock returns) is significantly positive. The

results support our conjecture that when corporate insiders’ potential gains are higher, the

publication of fear articles exert a smaller deterrence effect on insiders.

We further expect that a higher level of concurrently ongoing formal SEC

investigations would reduce the impact of the published fear articles on insiders, as during such

periods of ‘high salience’ of the SEC, insiders will likely anyway be more hesitant to transact

based on their private information. Conversely, the published articles are expected to exert

stronger influence on insiders when there is less formal activity by the SEC. In the latter case,

the articles would serve as a reminder to insiders of the potential risks from trading based on

their private information. We follow Del Guercio et al. (2017) and obtain the annual number

of formal SEC investigation, and we interact this with the number of fear articles. The results,

reported in column 5 of Table 3, show that insiders’ purchases are negatively related to the

level of formal SEC investigations. This result indicates that the SEC’s actions influence the

likelihood of insiders taking advantage of their private information. In line with our

expectation, we further find the parameter coefficient for the interaction variable between fear

articles and the number of SEC investigations to be significantly positive, as shown in columns

6 to 8. We conclude that fear articles have a stronger deterrent influence on insiders when the

number of formal SEC investigations are relatively low.

Finally, we explore whether the size of the target firm affects the impact of fear articles

on insider purchases. Due to resource constraints18, the SEC may be more likely to scrutinize

relatively large deals than they are small ones. Managers of small firms may therefore possibly

perceive the risk from trading prior to merger announcement to be lower than that of managers

in larger targets. We use a dummy for small target firms with market capitalization of less than

$100 million. As shown in column 9 of Table 3, the parameter coefficient of the small size

target firms is indeed significantly positive, indicating more opportunistic behavior by insiders

of small size target firms. If insiders in large companies are more cautious about trading than

those in smaller firms, fear articles may have more impact on insiders in small firms by alerting

18 While Seligman (2004) and Del Guercio et al. (2017) indicate that SEC’s resources have generally increased

over time (with increases in funding mainly after scandals and during market downturns), the agency may still not

have sufficient resources to investigate all trades.

18

them to the risks involved. In line with our expectation, the parameter coefficient of the

interaction variable in columns 10 to 12 is significantly negative, suggesting that managers of

small size firms respond more strongly to the publication of the fear articles.

4.4 The significance of the visibility and the severity of the articles

We next test whether the characteristics of the fear articles affect the strength of our

relation. We conjecture that it is more likely that insiders would notice and react to fear articles

that: (i) are longer, (ii) appear on the first page of the main sections of WSJ, and (iii) are more

severe in terms of content. Longer articles and those published on a front page are likely to

have more visibility and may therefore make more of an impression. While Beccaria (1764)

argues that it is the unerringness of punishment rather than the harshness of punishment that

will have the bigger impression on behavior, Del Guercio et al. (2017) argue that the threat of

a prison sentence for those convicted in a criminal trial likely has a much more potent deterrent

effect than the civil remedies available to the SEC. However, they also note that the probability

of a successful criminal conviction is also much lower. Whether the severity of the content of

the article influences the deterrence effect is therefore an open empirical question.

We first explore the impact of the length of the fear articles (as captured by the number

of words). As reported in columns 1 to 3 of Table 4, we find that the parameter coefficient on

the length of the articles is significantly negative. In line with our expectation, longer articles

seem to have more of an impact on the insiders’ behavior, and is associated with a larger

reduction in their share purchases after relevant publications.

[ please insert Table 4 around here ]

In columns 4 to 6 of Table 4 we explore whether articles on the front page of one of the

main sections of the Wall Street Journal (i.e., sections A, B or C) have more of an impact than

articles on other pages.19 The coefficient on “Front page” captures the incremental impact for

articles on the front page in comparison to the impact of fear articles published elsewhere in

the newspaper (as captured by the coefficient on the “Fear article” variable). Both variables are

highly significant in all three models, indicating that articles published on the front page of

19 Only three deterrence articles appear on the front page of the newspaper. We therefore combine the number of

articles on the front pages of the various sections of the WSJ. There are 9 articles which have no page citations

from Factiva. Our main results do not change if we remove these articles from the sample.

19

each section have significantly stronger deterrence effect on insiders’ purchases, although other

articles also have a significant impact.

Finally in this section, we test whether the content of the deterrence articles matters.

We split our articles into three groups based on their severity as indicated by the terms used in

the headline. We include articles with terms “charge”, “indict”, or “accuse” in the second group

of severity. Such articles account for 46% of the sample. Articles that contain the terms

“guilty”, “fined”, “convicted”, “fines”, “prison”, “sentence”, or “jail” are included in the third

group of severity. These articles comprise 23.6% of the sample. Finally, articles without any

of these terms are included in the first group of severity (29.3% of the sample). Columns 7 to

9 of Table 4 report the significance of the fear articles in relation to their severity. We find

evidence to suggest that insiders tend to reduce their purchases more after publication of

articles that use more severe terms. The coefficient on “Severity group 2” captures the

incremental impact for articles in the second group in comparison to the impact of fear articles

in the first group (as captured by the coefficient on the “Fear article” variable). Similarly, the

coefficient on “Severity group 3” captures the incremental impact for articles in the third group

in comparison to the impact of fear articles in the other groups. The results in general suggest

a monotonic increase in the strength of the deterrence effect as we move to articles with higher

severity, although some of these increases are not statistically significant. This finding is,

nevertheless, consistent with the quote saying that it is the probability rather than the severity

of the punishment that can more effectively deter wrongdoing.

4.5 The duration of the fear articles’ impact on insider purchases

While the fear articles are expected to raise the anxiety of trading based on inside

information, the real risk of engaging in insider trading may not change as a result of the

publication of the articles.20 We expect the deterrence effect to be a short-term reaction to the

publication of fear articles, and that the effect may become weaker as time passes since the

publication of the article. We explore here the duration of the impact of the fear articles on

insiders’ purchases. We use the sample of merger deals with one fear article only for this

analysis, since this sample selection offers a “clean” testing period without the existence of

overlapping articles. We thus compare the insider purchases after versus before the publication

of a fear article.

20 We explore this further in section 4.6 below.

20

We test the significance of the duration for all our dependent variables, with results

reported in Table 5. We first report in Columns 1 to 3 the baseline regression (as in the main

analysis in Table 2) for comparison purposes. Once again we find that the parameter coefficient

for the fear article is significantly negative, indicating that our main results are not driven by

our sample selection. We then test the purchasing activity by the insiders in relation to how

many days have lapsed since the fear article was published. We expect the magnitude of the

relation to be less pronounced with the passing of time. That is, the parameter coefficient for

the “Days since the article” variable is expected to be significantly positive, indicating more

purchases as time lapses after the publication of the article. This is indeed what we find for the

number of purchases and the total value of shares bought, as shown in columns 4 and 6,

although the coefficient for the percentage of equity bought in column 5, while positive, is not

statistically significant.

[ please insert Table 5 around here ]

Further, we explore the relation between deterrence articles and insiders’ purchases

when excluding the first five or ten days after each article publication, and re-run the main tests

for the remaining days, to see if there is a longer-term effect from the publication of the articles.

We expect the relation to weaken (or disappear) when excluding the days closely after the

publication of the fear articles. The results in columns 7 to 12 of Table 5 show that this is indeed

the case. As an example, we find that the parameter coefficient for the fear articles is -0.456

and significant at the 1% level using the full period as shown in column 1, but falls to -0.223

and is no longer statistically significant as shown in column 7 when excluding the first five

days after each fear publication. Finally, if excluding the first 10 days after the article, the effect

disappears, as shown in column 10.

To further explore the duration of the impact of the fear articles, we final run the main

regression for each day separately, starting on the day of the publication of a deterrence article,

and for the next ten days. As shown in Figure 3, there is a monotonic decrease in the strength

of the relation as we move further and further away from the day of the publication of the fear

article. This offers initial evidence that it is the publication of the fear articles that generates

our pattern, and not potentially other unobserved characteristics. In untabulated results, we also

21

find that there is no clear pattern on corporate insider reaction on fear articles beyond ten days,

showing that there is no reversal on their initial response.21

[ please insert Figure 3 around here ]

This reduction of the magnitude of the parameter coefficients is similar when using

alternative dependent variables in our estimations. The deterrence effect thus seems to be short-

lived. While the publication of deterrence articles have a significant impact on insiders’

behavior at the time of announcement, the temporary nature of the effect may suggest the effect

is a behavioral response, as if the fear articles were foretelling a tightening of insider trading

enforcement, a longer term effect might have been envisaged. We explore this further in the

next section.

4.6 Perceived risk versus informational channels

Our results indicate that the publication of fear articles have a significant, impact on

insider behavior. However, with articles referring to insider trading violations in past mergers,

such articles are arguably not expected to change the real risk of insides from trading in the

lead up to merger announcements. This, together with the temporary nature of the effect, as

discussed in the previous section, would suggest that the change in behavior we observe is

largely behavioral and a result of a change in the perceived risk of trading.

However, it is possible that the fear articles precede regulatory changes and as such

contain (or proxy for) relevant information about current or forthcoming changes in the actual

risk of engaging in insider trading. In this section we aim to disentangle the “perceived risk”

channel against the alternative “information” channel. To that end, similar to the way we

construct the fear article variable, we identify manually sixteen articles that clearly indicate

greater SEC enforcement in the future, and construct a dummy variable called “SEC tightening

article” in a similar manner.22 Columns 1 to 3 of Table 6 show that the impact of fear articles

remains highly statistically significant after including the Sec tightening article dummy. As a

21 In a further test of the timeliness of the WSJ news articles, we also explore whether there is any change in

insiders’ trading behaviour prior to the WSJ publication date. This could be the case if the WSJ e.g., report on

events which may have occurred (and possibly picked up by insiders from other news sources) prior to the WSJ

publication. In untabulated results, we find a reduction in insider trading starting only a few days prior to the

publication of the article (up to approximately five days) but not earlier, suggesting the WSJ publications are

timely. 22 One example of such an article has the following headline, “Insider Targets Expanding --- FBI Is Building

Cases on 120 People for Alleged Illegal Trading, Enlists Douglas”, dated on 28 February 2012.

22

further check, we use the article length and front page (as in Table 4) and the results still hold,

as shown at columns 4 to 9. For instance, regarding the number of purchases, we find that the

coefficient of the fear article dummy variable is -0.400 and that of the length variable is -0.060

(both statistically significant at the 1% level). These estimates are similar to those in Tables 2

and 4, suggesting our results are unlikely to be driven by a contemporaneous change in SEC

strictness towards insider trading activity.

[ please insert Table 6 around here ]

We also explore time trends in the publication of fear articles, SEC enforcement actions

and insider purchases. As shown in Figure 4, the time trends of fear articles and SEC formal

investigations (on an annual basis) move in the opposite directions – there are more SEC formal

investigations and fewer fear articles over time. Note that our articles do not necessarily refer

to SEC investigations only. In addition, insider trades seem to respond to SEC investigations

more, especially the formal ones – a higher level of SEC enforcement actions is followed by a

reduced level of insider purchases, e.g., around year 2003 or year 2009. This result indicates

that the reputation risk is an important factor in the potential costs of illegal insider trading.

Collectively, we do not find supporting evidence that these fear articles indicate a change in

real or actual risk of getting caught.

[ please insert Figure 4 around here ]

4.7 Robustness tests

This section summarizes various robustness tests of the main relation between fear

articles and insider trading we find in this study. We first test the robustness of the relation to

use of alternative econometric approaches. In Table 7 we first report the main results based on

Tobit estimation, which we use to address the issue of (left) censoring in the dependent

variables, in columns 1 to 3. We then add merger fixed effects and use Panel estimation

(columns 4 to 6). In further estimations, we estimate the parameter coefficients using Poisson

estimation (columns 7 to 9) and OLS (columns 10 to 12) for merger deals with at least one

purchase. Finally, we use the zero-inflated negative binomial estimation that addresses the

issue of the many zeros in our data (columns 13 to 17). Apart from the parameter coefficients

on the fear articles in columns 10 and 13 that are not quite statistically significant, all others

are significantly negative. Note that the OLS estimations are affected by the very large number

of firm-days with zero insider trades in our dataset and thus, OLS estimations likely under-

23

estimate the magnitude of the relation. Overall, these results highlight the robustness of the

relation to a range of alternative estimation methods.

[ please insert Table 7 around here ]

We further explore whether routine traders may be behind the pattern rather than

insiders engaging in opportunistic trading. In the spirit of Cohen et al. (2012), we identify

routine traders as those who have bought shares in their own firms in the same quarter for three

consecutive years. These may be routine traders who make similar transactions each year and

whose transactions may not reflect opportunism. To ensure that our results are not driven by

routine corporate insider purchases, we exclude such trades and re-estimate our results. As

shown in columns 18 to 20 of Table 8, the relation holds after relevant exclusions. If anything,

the relation becomes slightly stronger in economic terms when compared to the initial results

in Table 2, with parameter coefficients of -0.605 versus -0.389 (from Table 2) in relation to the

number of purchases, -0.876 versus -0.759 for the sum of the shares purchased, and -0.633

versus -0.485 for the value of such purchases, respectively.

Finally, we test whether the results hold if focusing on the individual insiders rather

than the target firms. For this test, we focus on insiders who undertake at least one trade in the

lead-up to an acquisition, and compare their level of purchases before and after the publication

of a fear article. Our results hold, confirming our main result that there are significantly fewer

purchases after the publication of fear articles (column 21) and of significantly lower value

(columns 22).

4.8 Placebo testing

Insiders are unlikely to be in possession of inside information about the forthcoming

acquisitions long before the merger announcements, and even if they did, it would be more

difficult for the SEC to prove a potential illegal activity. We would therefore not expect fear

articles to have an impact on insider purchasing activity a long time before the merger

announcements. As a placebo test, we therefore estimate the relation when using the relatively

early interval period between 270 and 180 calendar days prior the merger announcement rather

than the period from -90 to -2 used in the main analysis. We would expect fear articles to have

no impact on insiders’ transactions during this early time period, as insiders would likely have

little to fear if trading more than six months prior to a bid announcement. In line with our

24

expectation, results in Table 8 show that fear articles are not negatively associated with insider

trading activity during this earlier period.23

[ please insert Table 8 around here ]

5. Conclusion

This study explores whether news articles referring to illegal insider trading in past

acquisitions affect target company insiders’ trading behavior prior to public announcements of

takeover bids for their companies. Such news stories may temporarily heighten the fear and

perceived risk of purchasing shares in the lead up to merger announcements, leading to a

change in behavior. We are focusing on corporate insiders’ purchases of shares in their own

company prior to the firm receiving a takeover bid, since target firms tend to experience

significant increases in their stock returns prior to their merger announcements. Based on a

sample of US acquisitions between 1996 and 2014 and articles in the Wall Street Journal

relating to insider trading, we find a significant reduction in purchases by target company

insiders after the publication of an article referring to illegal insider trading in past merger

deals.

We find that the reduction in insider purchases is most pronounced where the article is

published on a front page of one of the Wall Street Journal section front pages rather than

inside the paper, and the impact is also stronger when the article is long. The visibility of the

article seems to matter. The effect is also stronger when the content of the article is more severe,

such as discussing people being prosecuted or convicted of illegal insider trading. Such articles

may again draw more attention and still a higher level of fear in insiders than other insider

trading related articles. However, if insiders weigh up the pleasure (potential gain) of trading

against the potential pain (risk of getting caught), as predicted by the Classic Deterrence theory,

we might expect the impact of deterrence articles to be weaker when the expected gains from

buying would be higher (i.e., when there are higher abnormal returns in the run-up and

including the period of the bid announcement). This is indeed what we find. We also find the

deterrence article effect to be weaker during periods when there are more formal investigations

by the SEC – periods when insiders may anyway be fearful of engaging in trading for fear of

attracting unwanted SEC attention. The effect holds when controlling for other news stories

23 Columns 1 to 3 include all control variables, industry fixed effects, and prior-to-article fixed effects, but not the

10-day interval fixed effects and the multiple-article dummy.

25

which may indicate a tightening of SEC enforcement, suggesting the reaction to the fear articles

may be mainly a behavioral effect rather than a rational response to changes in the real risk of

censure for insiders who trade.

While fear articles may heighten insiders’ perception of the risk from engaging in

insider trading, we do not find that the fear articles, which refer to insider trading violations in

past mergers, help predict e.g., changes in SEC policies or enforcement of changes. There is

thus no evidence to suggest the change in behavior is the result of changes in the real risk of

engaging in insider trading. Rather, it would appear to be a behavioral response. This is also

supported by the relatively short term nature of the deterrence effect, with the negative relation

between fear articles and insiders’ level of trading purchasing dissipating gradually within a

ten day interval following relevant publications.

A possible limitation of our study is that it is not possible for us to know who of the

corporate insiders may have read the particular articles published in the Wall Street Journal.

However, managers are generally considered to be informed market participants, and we would

argue that it is reasonable to assume that a significant proportion of them regularly read

financial newspapers, such as the Wall Street Journal which has the highest circulation of US

newspapers. Importantly, to the extent that some insiders have not read the Wall Street Journal

‘fear articles’, this would bias against the results against our hypothesis. We may therefore, if

anything, be underestimating the magnitude of the relation reported in this study. Our results

highlight the importance of the media in influencing investor behavior and its role in deterring

insiders from using their information advantage for private gain.

Acknowledgments

We would also like to thank Christopher Flanagan for his support during data collection. Jo Danbolt holds the

Baillie Gifford Chair in Financial Markets, and his research is partially funded by a Baillie Gifford endowment

held by the University of Edinburgh Business School. Baillie Gifford has no role in or influence over the research

conducted.

26

References

Agrawal, A., Nasser, T., 2012. Insider trading in takeover targets. Journal of Corporate

Finance 18, 598–625.

Agrawal, A., Cooper, T., 2015. Insider trading before accounting scandals. Journal of

Corporate Finance 34, 169–190.

Anand, A., Choi, S., Pritchard, A., Puri, P., 2018. An Empirical Comparison of Insider Trading

Enforcement in Canada and the United States. SSRN working paper id. 3205553.

Andenaes, J., 1974. Punishment and deterrence. Ann Arbor: University of Michigan Press.

Barber, M., Odean, T., 2008. All that glitters: The effect of attention and news on the buying

behavior of individual and institutional investors. Review of Financial Studies 21, 786–818.

Bordalo, P., Gennaioli, N., Shleifer, A., 2012. Salience theory of choice under risk. Quarterly

Journal of Economics 127, 1243–1285.

Bordalo, P., Gennaioli, N., Shleifer, A., 2013. Salience and consumer choice. Journal of

Political Economy 121, 803–843.

Cohen, L., Malloy, C., Pomorski, L., 2012. Decoding inside information. Journal of Finance

67, 1009–1043.

Dai, L., Parwada, J., Zhang, B., 2015. The governance effect of the media’s news dissemination

role: Evidence from insider trading. Journal of Accounting Research 53, 331–366.

Del Guercio, D., Odders-White, E., Ready, M., 2017. The deterrent effect of Securities and

Exchange Commission’s enforcement intensity on illegal insider trading: Evidence from

run-up before news events. Journal of Law and Economics 60, 269–307.

Dessaint, O., Matray, A., 2017. Do managers overreact to salient risks? Evidence from

hurricane strikes. Journal of Financial Economics 126, 97–121.

Fang, L., Peress, J., 2009. Media coverage and the cross section of stock returns. Journal of

Finance 64, 2023–2052.

Giglio, S., Shue, K., 2014. No news is news: Do markets underreact to nothing? Review of

Financial Studies 27, 3389–3440.

Hong, C.Y., Li, F.W., Zhu, Q., 2018. Monitoring from afar: Do foreign institutional investors

deter insider trading? SSRN working paper id 3239075.

Jarrell, G., Poulsen, A., 1989. Stock trading before the announcement of tender offers: Insider

trading or market anticipation. Journal of Law Economics and Organizations 5, 224–248.

Kallunki, J., Kallunki, J-P., Nilsson, H., Puhakka, M., 2018. Do an insider’s wealth and income

matter in the decision to engage in insider trading? Journal of Financial Economics 130,

135–165.

Kaplanski, G., Levy, H., 2010. Sentiment and stock prices: The case of aviation disasters.

Journal of Financial Economics 95, 174–201.

King, M., 2009. Prebid run-ups ahead of Canadian takeovers: How big is the problem?

Financial Management 38, 699–726.

Liu, B., McConnell, J., Xu, W., 2017. The power of the pen reconsidered: The media, CEO

human capital, and corporate governance. Journal of Banking and Finance 76, 175–188.

Loughran, T., McDonald, B., 2011. When is a liability not a liability? Textual analysis,

dictionaries and 10-Ks. Journal of Finance 66, 35–65.

Morgenson, G., 27th August 2006. Whispers of mergers set off bouts of suspicious trading.

New York Times.

Nagin, D., 1998. Criminal deterrence research at the outset of the twenty-first century. Crime

and Justice: A Review of Research 23, 1–42.

Paternoster, R., 2010. How much do we really know about criminal deterrence? The journal of

criminal law and criminology, 765–824.

Pound, J., Zeckhauser, R., 1990. Clearly heard on the street: The effect of takeover rumors on

stock prices. Journal of Business 63, 291–308.

27

Rogers, J., Skinner, D., Zechman, S., 2016. The role of the media in disseminating insider

trading news. Review of Accounting Studies 21, 711–739.

Seligman, J., 2004. Self-funding for the Securities and Exchange Commission. Nova Law

Review 28, 233–59.

Tetlock, P., 2007. Giving content to investor sentiment: The role of media in the stock market.

Journal of Finance 37, 1139–1168.

Tetlock, P., 2011. All the news that’s fit to reprint: Do investors react to stale information?

Review of Financial Studies 24, 1481–1512.

Tversky, A., Kahneman, D., 1973. Availability: a heuristic for judging frequency and

probability. Cognitive Psychology 4, 207–232.

Tversky, A., Kahneman, D., 1974. Judgment under uncertainty: heuristics and biases. Science

185, 1124–1131.

Wilson, J., Kelling, G., 1982. The police and neighborhood safety: Broken windows. The

Atlantic 249, 29–38.

Zimring, F., Hawkins, G., 1973. Deterrence: The legal threat in crime control. Chicago:

University of Chicago Press.

28

Appendix: Variable definitions This appendix presents the variables used for the main empirical analysis (in alphabetical order) and describes

their construction. All days represent trading days. We obtain stock price data from CRSP, balance sheet data

from Compustat, and deal-specific information from Thomson ONE. All balance sheet items are measured at the

fiscal year end before the deal announcement date, obtained from Thomson ONE, unless noted otherwise.

Variable Definition

Fear article An indicator variable taking the value of one if there is a fear article on or prior to

the day, and zero otherwise.

Historical stock return Average daily excess returns of the target over the last four years compared to S&P

500 (winsorized at the 1% level).

Market-to-book Market to book ratio of common equity of the target (Compustat data items: prcc_c

* csho / ceq, winsorized at the 1% level).

Market value The natural logarithm of target’s market capitalization (Thomson ONE data item:

Target Market Value 4 Weeks Prior to Announcement ($mil)).

Number of purchases The number of purchases

Percentage of equity

purchased

The natural logarithm of one plus the number of purchases divided by the number

of shares outstanding

ln(1 + 104 * shares (from Thomson Reuters insiders filing)/1000 * shrout

(from CRSP))

Rumor An indicator variable taking the value of one if there is a takeover rumor pertaining

to the deal before the announcement date, and zero otherwise.

StdDev of returns The natural logarithm of one plus the standard deviation of daily stock returns

computed over trading days (−250,−126) relative to the announcement date.

Target-bidder ratio The natural logarithm of one plus the ratio of target’s market capitalization to

bidder’s market capitalization

ln(1 + (Target Market Value 4 Weeks Prior to Announcement

/(csho_Acq*prcc_f_Acq)) * 100)

Tender offer An indicator variable taking the value of one if the deal is a tender offer, and zero

otherwise. The corresponding data item from Thomson ONE is “Tender Offer

(Y/N)”.

Value of purchases The natural logarithm of one plus the dollar value of purchases

ln(1 + shares * tprice (both from Thomson Reuters insiders filing))

29

Table 1 Descriptive statistics

Panel A: Descriptive statistics of variables used

Mean Median Min Max Dev. N

Deal-trading-day based variables

Number of purchases 0.011 0 0 20 0.225 93,213

% equity purchased 0.001 0 0 3.8 0.027 93,213

Value of purchases ($) 1,529 0 0 8,273,053 70,949 93,213

Number of purchases, where at least one purchase 2.064 1 1 20 2.269 503

Deal-based variables

Rumor 0.14 0 0 1 0.34 1,541

Tender offer 0.16 0 0 1 0.36 1,536

Market value (of target) (ln) 5.48 5.39 -0.24 11 1.79 1,526

StdDev of returns 1.42 1.38 0.41 3.59 0.44 1,516

Target-to-bidder ratio (ln) 2.48 2.59 -1.29 6.23 1.38 1,450

Market-to-book 2.82 1.86 -2.15 25.99 3.67 1,458

Historical stock return 0.08 0.07 -0.22 0.54 0.12 1,520

Panel B: Insider transactions around the publication of the article (Day 0) of mergers with a fear article

Day Number of purchases % equity purchased Value of purchases Number of deals

-10 0.0077 0.0003 289.20 391

-9 0.0079 0 376.12 378

-8 0.0155 0.0014 535.02 387

-7 0.0186 0.0011 3,276.02 430

-6 0.0149 0 34.51 268

-5 0 0 0.00 190

-4 0.0065 0 25.73 310

-3 0.0048 0.0002 61.39 413

-2 0 0 0.00 406

-1 0.0047 0 0.50 422

0 0.004 0.0002 63.53 497

1 0.007 0 7.04 287

2 0 0 0.00 191

3 0 0 0.00 314

4 0 0 0.00 401

5 0 0 0.00 385

6 0 0 0.00 389

7 0 0 0.00 435

8 0.0041 0 62.48 245

9 0.0116 0 2.86 173

10 0.0172 0.0014 217.07 290

Panel C: Mean tests

Mergers

without a

fear article

Mergers

with a fear

article

Difference

(two-sided)

Mergers with a fear

article

Difference

(two-sided)

Before the

article

Since the

article

Number of purchases 0.0126 0.0088 -0.0214**

(0.0307)

0.0109 0.0068 -0.0177**

(0.0365)

% equity purchased

(ln transformed)

0.0086 0.0050 -0.0136***

(0.0004)

0.0073 0.0029 -0.0102***

(0.0007)

Value of purchases

(ln transformed)

0.0620 0.0383 -0.1003***

(0.0000)

0.0509 0.0266 -0.0775***

(0.0006)

Number of

observations

38,753 30,788 14,811 15,977

This table offers the descriptive statistics of the variables used in this study. See detailed variable definitions in

the Appendix.

30

Table 2 Insider purchasing activity after the publication of fear articles

# purchases sum %

equity

sum value

purchases

# purchases sum %

equity

sum value

purchases

(1) (2) (3) (4) (5) (6)

Fear article -0.451*** -0.769*** -0.552*** -0.389*** -0.759*** -0.485***

(0.000) (0.000) (0.000) (0.000) (0.000) (0.000)

Rumors 0.119 0.177 0.078*

(0.231) (0.167) (0.087)

Tender offer -0.273** 0.239** 0.327***

(0.012) (0.025) (0.000)

Market value -0.013 -0.303*** -0.055***

(0.573) (0.000) (0.000)

StdDev of returns -0.278*** -0.348*** -0.322***

(0.005) (0.003) (0.000)

Target-bidder ratio 0.061** 0.174*** 0.115***

(0.016) (0.000) (0.000)

Market-to-book -0.069*** -0.042** -0.023***

(0.000) (0.016) (0.000)

Historical stock return -1.322*** -1.527*** -1.559***

(0.000) (0.000) (0.000)

Constant -4.055*** -4.845*** -2.967*** -3.039*** -1.779*** -1.247***

(0.000) (0.000) (0.000) (0.000) (0.000) (0.000)

Pseudo R2 0.005 0.015 0.011 0.039 0.069 0.039

10-day FEs Yes Yes Yes Yes Yes Yes

Prior-to-article FEs Yes Yes Yes Yes Yes Yes

Multiple-article FEs Yes Yes Yes Yes Yes Yes

Industry FEs No No No Yes Yes Yes

Observations 83,855 83,855 83,855 83,855 83,855 83,855

This table explores the relation on insider purchasing activity after the publication of fear articles. We compare

corporate insider purchases from the day the first deterrence article was published until day -2 (where day 0 refers

to the day of the bid announcement) in relation to purchasing activity before the publication of the deterrence

articles, and with merger deals without any published fear article before their announcements. We use three

variables as our dependent variable in order to ensure the robustness of our findings: the daily number of

purchases, the sum of percentage of the shares purchased, and the sum of the value of the purchases in $. The

interval to measure corporate insider purchases is based on trading days prior to each merger announcement. We

use Poisson regressions across the study since this approach deals with count data. The main independent variable

under consideration is the fear article. “Fear article” is a dummy variable that takes the value of one from the day

the deterrence article was published (from day -90 onwards) until day -2. If more than one deterrence article was

published prior to a particular merger announcement, we consider the day the first fear article is published until

day -2. We add dummies to control for the additional fear articles published before merger announcements. P-

values are shown in parentheses. ** and *** indicate statistical significance at the five and one percent levels,

respectively.

31

Table 3 Insider purchasing activity after the publication of fear articles: Potential pleasure versus potential pain

#

purchases

#

purchases

sum %

equity

sum value

purchases

#

purchases

#

purchases

sum %

equity

sum value

purchases

#

purchases

#

purchases

sum %

equity

sum value

purchases

(1) (2) (3) (4) (5) (6) (7) (8) (9) (10) (11) (12)

Fear article -1.355*** -2.430*** -1.448*** -8.636*** -9.564*** -4.454*** -0.228 -1.062*** -0.345***

(0.000) (0.000) (0.000) (0.000) (0.000) (0.000) (0.105) (0.000) (0.000)

Fear article * CAR>0 0.287*** 0.462*** 0.293***

(0.000) (0.000) (0.000)

Fear article *# investigations 1.460*** 1.569*** 0.708***

(0.000) (0.000) (0.000)

Fear article* Small size targets -0.721** -0.410 -1.097***

(0.013) (0.229) (0.000)

CAR>0 0.171*** 0.104*** 0.103*** 0.051***

(0.000) (0.001) (0.006) (0.000)

# investigations -0.792*** -1.328*** -1.660*** -1.122***

(0.000) (0.000) (0.000) (0.000)

Small size targets 0.408*** 0.531*** 0.419** 0.436***

(0.003) (0.000) (0.015) (0.000)

Constant -3.794*** -3.555*** -2.358*** -1.545*** 1.134 4.239*** 7.158*** 4.816*** -6.459*** -6.397*** -3.492*** -2.722***

(0.000) (0.000) (0.000) (0.000) (0.111) (0.000) (0.000) (0.000) (0.000) (0.000) (0.000) (0.000)

Pseudo R2 0.041 0.044 0.076 0.043 0.041 0.045 0.077 0.045 0.122 0.124 0.161 0.100

Previous controls and FEs Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes

Observations 83,855 83,855 83,855 83,855 83,855 83,855 83,855 83,855 38,377 38,377 38,377 38,377

This table explores the strength of the relation in association with insider potential pleasure versus pain. We explore the significance of the cumulative target stock returns in

the interval period between -60 and +1 at columns 1 to 4, the significance of the number of formal investigations by the SEC at columns 5 to 8, and the significance of the size

of the target firms at columns 9 to 12. The CAR variable is defined as the natural logarithm of one plus CAR(-60,+1) for positive CAR(-60,+1), and zero otherwise. The #

investigation variable is defined as the natural logarithm of the number of formal investigations in the year of the announcement. We define as small size targets (a dummy

variable), firms with a market capitalization less than $100 million. P-values are shown in parentheses. *** indicates statistical significance at the one percent level.

32

Table 4 Insider purchasing activity after the publication of fear articles: Article visibility and the severity of the perceived risk

# purchases sum %

equity

sum value

purchases

# purchases sum %

equity

sum value

purchases

# purchases sum %

equity

sum value

purchases

(1) (2) (3) (4) (5) (6) (7) (8) (9)

Length -0.060*** -0.127*** -0.077***

(0.000) (0.000) (0.000)

Fear article -0.326*** -0.610*** -0.426*** -0.202 -0.401** -0.122**

(0.001) (0.000) (0.000) (0.126) (0.014) (0.037)

Front page -0.458** -1.326*** -0.464***

(0.011) (0.000) (0.000)

Severity group 2 -0.145 -0.495*** -0.464***

(0.275) (0.004) (0.000)

Severity group 3 -0.437** -0.117 -0.200**

(0.011) (0.602) (0.012)

Constant -3.038*** -1.775*** -1.246*** -3.034*** -1.774*** -1.242*** -3.030*** -1.772*** -1.233***

(0.000) (0.000) (0.000) (0.000) (0.000) (0.000) (0.000) (0.000) (0.000)

Pseudo R2 0.039 0.069 0.039 0.039 0.072 0.040 0.040 0.070 0.041

Previous controls and FEs Yes Yes Yes Yes Yes Yes Yes Yes Yes

Observations 83,855 83,855 83,855 83,855 83,855 83,855 83,855 83,855 83,855

This table explores the relation in association with the article visibility and the severity of the perceived risk. We explore the significance of the length of the articles as shown

by the number of words used at columns 1 to 3, the significance of the publication of the articles at the first page of each section at the Wall Street Journal at columns 4 to 6,

and the significance of the severity of the terms used in the headline of each article at columns 7 to 9. Length is the natural logarithm of the number of words in the article.

Front page is a dummy variable that is equal to one if the article is on the first page of the main sections of WSJ, and zero otherwise. Articles with high severity are assigned to

a higher group (i.e., articles in Severity group 3 use more severe terms than articles assigned to Severity group 2). P-values are shown in parentheses. ** and *** indicate

statistical significance at the five and one percent levels, respectively.

33

Table 5 Insider purchasing activity after the publication of fear articles: The duration of the impact

# purchases sum % equity sum value purchases # purchases sum % equity sum value purchases

(1) (2) (3) (4) (5) (6)

Fear article -0.456*** -1.045*** -0.572***

(0.003) (0.000) (0.000)

Days since the article 0.760*** 0.114 0.441***

(0.000) (0.577) (0.000)

Constant -4.120*** -2.542*** -2.930*** -38.079 -35.104 -20.184

(0.000) (0.001) (0.000) (0.987) (0.989) (0.983)

Pseudo R2 0.059 0.146 0.064 0.156 0.145 0.114

Controls, Industry, 10-day FEs Yes Yes Yes Yes Yes Yes

Observations 27,431 27,431 27,431 14,319 14,319 14,319

# purchases sum % equity sum value purchases # purchases sum % equity sum value purchases

(7) (8) (9) (10) (11) (12)

Fear article (date +5) -0.223 -0.831*** -0.342***

(0.146) (0.000) (0.000)

Fear article (date +10) 0.063 -0.509** -0.033

(0.686) (0.026) (0.678)

Constant -4.191*** -2.612*** -3.014*** -4.251*** -2.690*** -3.096***

(0.000) (0.001) (0.000) (0.000) (0.001) (0.000)

Pseudo R2 0.057 0.141 0.061 0.056 0.137 0.059

Controls, Industry, 10-day FEs Yes Yes Yes Yes Yes Yes

Observations 27,431 27,431 27,431 27,431 27,431 27,431

This table explores the duration of the relation. We use in this table merger deals with one fear article only. We explore the significance of the main relation at columns 1 to 3.

Columns 4 to 6 test the significance of the relation in association on which day the purchasing activity takes place in relation to the publication of the fear articles. Columns 7

to 12 test the magnitude of the relation when excluding the first five or ten days after each fear article published. P-values are shown in parentheses. * and *** indicate statistical

significance at the ten and one percent levels, respectively.

34

Table 6 Insider purchasing activity after the publication of fear articles: Risk perception versus informational channels (real risks)

#

purchases

sum %

equity

sum value

purchases

#

purchases

sum %

equity

sum value

purchases

#

purchases

sum %

equity

sum value

purchases

(1) (2) (3) (4) (5) (6) (7) (8) (9)

Fear article -0.400*** -0.759*** -0.496*** -0.367*** -0.631*** -0.463***

(0.000) (0.000) (0.000) (0.000) (0.000) (0.000)

Length -0.060*** -0.126*** -0.078***

(0.000) (0.000) (0.000)

Front page -0.248 -1.192*** -0.265***

(0.183) (0.001) (0.003)

SEC tightening article -0.593*** -0.643*** -0.635*** -0.584*** -0.631*** -0.623*** -0.545*** -0.505*** -0.584***

(0.000) (0.001) (0.000) (0.000) (0.001) (0.000) (0.000) (0.009) (0.000)

Constant -3.081*** -1.856*** -1.287*** -3.082*** -1.854*** -1.288*** -3.076*** -1.834*** -1.281***

(0.000) (0.000) (0.000) (0.000) (0.000) (0.000) (0.000) (0.000) (0.000)

Pseudo R2 0.041 0.071 0.041 0.041 0.071 0.041 0.041 0.073 0.042

Previous controls and FEs Yes Yes Yes Yes Yes Yes Yes Yes Yes

Observations 83,855 83,855 83,855 83,855 83,855 83,855 83,855 83,855 83,855

This table explores the strength of the relation after considering for real litigation/reputation risks. We explore the significance of the main results at columns 1 to 3 and the

significance of the length of the articles at columns 4 to 6, and the significance of the front page of the articles at columns 7 to 9. Length is the natural logarithm of the number

of words in the article. Front page is a dummy variable that is equal to one if the article is on the first page of the main sections of WSJ, and zero otherwise. The “SEC tightening

article” is a dummy variable that takes the value of one if there is any article indicating a change in SEC enforcement articles prior to or on that day. P-values are shown in

parentheses. *, ** and *** indicate statistical significance at the ten, five and one percent levels, respectively.

35

Table 7 Insider purchasing activity after the publication of fear articles: Robustness tests

# purchases sum % equity sum value purchases # purchases sum % equity sum value purchases

Tobit Tobit Tobit Panel Panel Panel

(1) (2) (3) (4) (5) (6)

Fear article -0.004* -0.005*** -0.025*** -0.005** -0.006*** -0.035***

(0.056) (0.000) (0.001) (0.030) (0.000) (0.000)

Constant 0.030*** 0.037*** 0.165*** 0.014*** 0.011*** 0.072***

(0.000) (0.000) (0.000) (0.000) (0.000) (0.000)

var(e.count_trades_A) 0.055***

(0.000)

var(e.ln_sum_trades_A) 0.020***

(0.000)

var(e.ln_sum_trades_val_A) 0.592***

(0.000)

R2 0.073 0.085 0.068

Pseudo R2 -0.016 -0.002 0.001

Previous controls and FEs Yes Yes Yes

Deal FEs Yes Yes Yes

Observations 83,855 83,855 83,855 48,653 48,653 48,653

# purchases sum % equity sum value purchases # purchases sum % equity sum value purchases

Poisson Poisson Poisson OLS OLS OLS

(7) (8) (9) (10) (11) (12)

Fear article -0.217** -0.804*** -0.421*** -0.021 -0.037*** -0.172***

(0.036) (0.000) (0.000) (0.249) (0.001) (0.004)

Constant -0.674** 1.084*** 1.431*** 0.274*** 0.300*** 1.477***

(0.022) (0.004) (0.000) (0.000) (0.000) (0.000)

R2 0.012 0.026 0.015

Pseudo R2 0.059 0.120 0.050

Previous controls and FEs Yes Yes Yes Yes Yes Yes

Observations 11,366 11,366 11,366 11,366 11,366 11,366

36

Table 7 – continued

# purchases sum % equity sum value purchases sum % equity (quintile) sum value purchases (quintile)

Zero-inflated negative binomial

(13) (14) (15) (16) (17)

Fear article -0.165 -0.817*** -0.111*** -0.369*** -0.355***

(0.401) (0.000) (0.002) (0.000) (0.003)

Constant -2.429*** -1.396*** 2.146*** 2.072*** 0.755***

(0.000) (0.008) (0.000) (0.000) (0.005)

Constant (inflate) 0.934*** -15.004*** 5.452*** 5.292*** 5.330***

(0.007) (0.000) (0.000) (0.000) (0.000)

Lnalpha 4.577*** 4.413*** -18.262*** -18.000*** -1.28e+05***

(0.000) (0.000) (0.000) (0.000) (0.000)

Previous controls and FEs Yes Yes Yes Yes Yes

Log lik. -3459.548 -2790.985 -3950.497 -3608.976 -3653.948

Chi-squared 198.378 262.134 171.022 312.432 145.187

Prob.>Chi2 0.000 0.000 0.000 0.000 0.000

Observations 83,855 83,855 83,855 83,855 83,855

# purchases sum % equity sum value purchases

Non-routine purchases

(18) (19) (20)

Fear article -0.605*** -0.876*** -0.633***

(0.000) (0.000) (0.000)

Constant -3.408*** -1.813*** -1.378***

(0.000) (0.000) (0.000)

Pseudo R2 0.050 0.074 0.044

Previous controls and FEs Yes Yes Yes

Observations 83,855 83,855 83,855

37

Table 7 – continued

sum % equity sum value purchases

Individuals purchases

(21) (22)

Fear article -1.458*** -1.624***

(0.000) (0.000)

Constant 7.365*** 8.909***

(0.000) (0.000)

R2 0.445 0.311

Previous controls and Fes Yes Yes

Observations 662 662

This table explores the robustness of the relation. We test alternate methodological estimations at columns 1 to 17. We only test the relation for non-routine purchases at columns

18 to 20. Finally, we test the relation for individual purchases at columns 21 and 22. P-values are shown in parentheses. ** and *** indicate statistical significance at the five

and one percent levels, respectively.

38

Table 8 Placebo testing

# purchases sum % equity sum value purchases

(1) (2) (3)

Alternative window [-270,-180]

Fear article -0.056 0.248*** -0.038

(0.280) (0.000) (0.102)

Constant -4.099*** -2.178*** -1.044***

(0.000) (0.000) (0.000)

R2

Pseudo R2 0.047 0.087 0.044

Previous controls and FEs Yes Yes Yes

Observations 80,050 80,050 80,050

This table undertakes a placebo testing as shown at columns 1 to 3 by using the interval period between -270 and -180 in order to test the main relation. P-values are shown in

parentheses. *, ** and *** indicate statistical significance at the ten, five and one percent levels, respectively.

39

Figure 1 Number of corporate insider purchases prior to merger announcements

40

Figure 2 Abnormal stock returns for target firms in relation to the day of merger

announcements

Figure 3 Regression coefficients of daily variables since the publication of a deterrence

article

41

Figure 4 Time trends of articles, enforcement actions and insider purchases