Kenneth R. Ahern

Bargaining Power and Industry Dependence in Mergers

In contrast to the widely held belief that targets capture the lions share of merger gains, I show that the average dollar gains to targets are only modestly more than the dollar gains to acquirers. To help explain the variation in merger outcomes, I present empirical evidence in support of a new hypothesis that a targets relative scarcity (proxied by its market power) and product market dependence (proxied by customer–supplier relations) help to explain its share of the total merger gains. These results provide new evidence for an unexplored role of product markets on bargaining outcomes in mergers.

Who Writes the News? Corporate Press Releases during Merger Negotiations: Who Writes the News?

Firms have an incentive to manage media coverage to influence the outcome of important corporate events. We investigate this hypothesis by studying corporate press releases during mergers. Using comprehensive data on media coverage and novel data on merger negotiations, we find that bidders in stock mergers originate substantially more news stories after the start of merger negotiations, but before the public announcement. This strategy generates a short-lived run-up in bidders’ stock prices during the period when the stock exchange ratio is determined. The run-up and reversal in media coverage and stock prices cannot be explained by merger rumors, passive media management, or opportunistic merger timing. Overall, we present the first evidence on active media management in M&A. First Draft: 15 March 2010 This Version: 25 April 2011 JEL Classification: G14, G34

Peer Effects in Risk Aversion and Trust

Existing evidence shows that risk aversion and trust are largely determined by environmental factors. We test whether one such factor is peer influence. Using random assignment of MBA students to peer groups and predetermined survey responses of economic attitudes, we find causal evidence of positive peer effects in risk aversion and no effects in trust. After the first year of the MBA program, the difference between an individual and her peers’ average risk aversion has shrunk by 41%. Finding no peer effects in trust is consistent with recent research showing that distinct cognitive processes govern risk aversion and trust. (JEL D81, D83, D01)

Network Centrality and the Cross Section of Stock Returns

Industries that are more central in the network of intersectoral trade earn higher stock returns than industries that are less central. To explain this finding, I argue that stocks in more central industries have greater market risk because they have greater exposure to sectoral shocks that transmit from one industry to another through intersectoral trade. Consistent with this argument, stock returns of central industries covary more closely with market returns and future consumption growth. In addition, the empirical evidence suggests that sectoral shocks that contribute to aggregate risk are more likely to pass through central industries than peripheral industries.

Information Networks: Evidence from Illegal Insider Trading Tips

This paper exploits a novel hand-collected data set to provide a comprehensive analysis of the social relationships that underlie illegal insider trading networks. I find that inside information flows through strong social ties based on family, friends, and geographic proximity. On average, inside tips originate from corporate executives and reach buy-side investors after three links in the network. Inside traders earn prodigious returns of 35% over 21 days, with more central traders earning greater returns, as information conveyed through social networks improves price efficiency. More broadly, this paper provides some of the only direct evidence of person-to-person communication among investors.

Do Common Stocks Have Perfect Substitutes? Product Market Competition and the Elasticity of Demand for Stocks

Though common stocks are one of the most important assets in an economy, little is known about their demand curves. I estimate demand curves for 144 NYSE stocks using a unique data set of all orders, including off-equilibrium orders, during three months in 1990 and 1991. Connecting asset pricing with industrial organization, I find that stocks of firms in less competitive industries are more elastic because they have closer substitutes than stocks in more competitive industries. Tests that exploit the 1991 Gulf War shock and S&P 500 Index additions confirm these results.

Do Proxies for Informed Trading Measure Informed Trading? Evidence from Illegal Insider Trades

This paper exploits hand-collected data on illegal insider trades to test whether standard illiquidity measures can detect informed trading. Controlling for unobserved cross-sectional and time-series variation, sampling bias, and strategic timing of insider trades, I find that only absolute order imbalance and the negative autocorrelation of order flows are statistically and economically robust predictors of insider trading. However, this result only holds for short-lived information. When information is long-lived, none of the measures of illiquidity I consider detect informed trading, including bid-ask spreads, Kyles lambda, and Amihud illiquidity. These results suggest that standard measures of illiquidity have limited applications.

Mergers and Acquisitions in 2007

The widely respected UCLA Anderson economic forecast for 2007 reports that real gross domestic product (GDP) growth in 2006 was 3.2% and forecasts 2.0% for 2007. Since business investments and M&A are sensitive to economic conditions, a question is raised about their levels for 2007. Growth rates in real GDP beginning in the third quarter of 2006 through the second quarter of 2007 are estimated at about 1.7% per quarter at annual rates. Real GDP rates for subsequent quarters are expected to rise to over 3.5% per quarter through the end of 2008. These data raise the question of whether M&A activities will decline during 2007.