Institutional trading behavior around significant corporate restructuring announcements: The case of life insurance companies around mergers and leveraged buyouts

This study reports the results of an investigation of security price formation and financial events using actual trades performed by a special segment of institutional investors. The data consists of the identity of the traders, the purchase and sale dates, and the price and volume of each merger-related and leveraged buyout (LBO)-related transaction made by the 25 largest mutual and 25 largest stock life insurance companies during 1984-1988. The insurance company annual statement provided through the State Insurance Commissioner's office discloses the details concerning each trade. This study is the first of its kind in the finance literature and provides further insight into the trading activities of a special class of informed investors around significant corporate restructuring announcements. Approximately 2,200 merger and LBO-related transactions representing almost $3.5 billion and involving 619 restructurings are identified. The life insurance sample appears to exhibit a superior performance in the selection and timing of target company transactions. About 90 % of the trades are profitable, generating a return premium of around 10 % over a random target selection strategy. In addition, average sale transactions are performed close to the maximum price during the event period as indicated by a Price Efficiency Ratio of 93%. Mutual firms, however, appear to outperform stock firms. Realized returns for mutuals are 38% (103% annualized); stock firms earn 23% (57% annualized). An optimal firm size appears to emerge at the $10 billion to $20 billion asset level, and $1 billion to $4 billion equity level.