Occasional Paper No. 4: Why has the FCAs market cleanliness statistic for takeover announcements decreased since 2009?

Published: 10/07/2014     Last Modified: 10/07/2014

This paper investigates the possible explanations for the fall in the statistics in market cleanliness.

Why are we publishing this paper?

We are committed to encouraging debate among academics, practitioners and policymakers in all aspects of financial regulation. To facilitate this, we publish a series of Occasional Papers in financial regulation, extending across economics and other disciplines.

Since 2008, the FSA/FCA Annual Report has included our ‘market cleanliness statistic’ as an indicator of the level of insider trading in UK equity markets. To calculate it, we analyse the scale of share price movements in the two days prior to takeover announcements to identify abnormal movements in share prices. The market cleanliness statistic is the percentage of those announcements that show abnormal pre-announcement price movements.

After remaining close to 30% for four years, the FCA’s market cleanliness statistic for takeovers decreased to about 15% between 2010 and 2013. This paper investigates the possible explanations for the fall in the statistic. We find evidence to exclude methodological bias, information leaking earlier relative to the takeover announcement or changes in sample characteristics as explanations for the decrease. 

This supports the hypothesis that the recent decrease in the statistic indicates that markets are cleaner. We note that the change in the statistic coincides with a material increase in regulatory enforcement activity and sanctions. Finally, we show that international comparisons of market cleanliness statistics can be misleading, and so should not be made, because countries have different disclosure regimes that affect the overall level of the statistic.

Occasional Paper No. 4: Why has the FCAs market cleanliness statistic for takeover announcements decreased since 2009?

Disclaimer

The views in this paper are solely the responsibility of the authors and should not be interpreted as reflecting the views of the Financial Conduct Authority (FCA). All errors or omissions are the authors’ sole responsibility.

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