Does information leak before merger announcement?

The aim of this paper is to examine changes in information asymmetry around the merger announcements. Empirical studies generally find evidence of a significant reaction of stock price or bid-ask spread before the initial announcement date, but they do not consider separately the different components of the spreads, nor do they take into account the implications of the market microstructure on the reaction of traders to merger announcements. Using intraday data, we investigate empirically the behavior of the components of 89 target firms´ bid-ask spreads around the merger announcements between January 2003 and December 2006. We use the Lin, Sanger and Booth (1995) model to estimate the adverse selection component. Our results show that the information indeed leaks from 30 days prior to the announcement date. We also look at the difference between the ST and non ST, low and high market value firms and we find for ST and low market value firms, information of the announcements have already learned by the liquidity suppliers before the announcement date while the non ST and high market value firms decrease significantly after the announcement date.