M&A operations: further evidence of informed trading in the CDS market

Abstract

tPrevious studies showed that private information gathered through banking services suchas loans and syndicated debt is incorporated into CDS rates by large banks. Additionally,there is also evidence that innovations in CDS rates precede stock market returns prior tocredit events. This paper adds to the literature by showing that the information obtained bymajor banks while providing M&A investment banking services is assimilated by CDS ratesprior to the operation announcement. We also find strong supportive evidence that CDSinnovations have incremental predictive power over stock returns before M&A announce-ments, and that this predictive power may be even greater when major dealers in the CDSmarket supplied investment banking services to one of the parts of the deal.