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Unusual activity (Part 2)

Has the market been able to anticipate major deals? Here's what we found:

A key part of the analysis was trying to filter out non-deal related variables that could have affected share price movements. One of those external factors is the overall market, represented by our old friend, the Straits Times Index (STI). Another independent factor is the stock's historical volatility relative to the market, or beta; a more volatile stock would tend to change more than the market, price-wise. To remove those variables, you simply subtract the product of the STI's change and the stock's beta from the stock's price change. That excess return suggests how much the share price changed because of factors other than the overall market and the stock's own volatility.

The analysis is far from perfect (if there was an easier way to increase the sample size, let me know), but the large proportion of stocks in the studied sample that showed significant excess returns does suggest a closer look might be a worthy endeavour. Also, the handful of counters that showed outsized excess returns are probably safely within the study's error margins.

A note of caution, though. As a number of experts mentioned, just because a stock went up before a deal does not mean it was due to insider trading. Sometimes there's no good reason for speculation. Also, not every stock that goes up is going up because a deal is in the works. Beware the false positive!

From a public service perspective, it is a good sign that the regulators are trying to address the issue of insider trading. SGX has implemented an early notification system whereby listed companies are expected to inform the exchange about deal negotiations ahead of public disclosure. They also have to furnish the exchange with a list of parties that might have insider information.

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That is a step in the right direction, but it's important to recognise that there's probably no failsafe solution. For example, not every deal-in-the-works involves the company. An external party preparing to launch a bid may not tell the company about its plans, and in that case SGX would not have the advantage of early notification.

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