Executive Compensation and Informed Trading in Acquiring Firms around Merger Announcements Umut Ordu † and Denis Schweizer ‡ Abstract This paper analyzes informed trading in acquiring firms through (stock) merger announcements. We show that pre-announcement abnormal option volumes in acquiring firms strongly increase ahead of a stock merger (by approximately 300%). Furthermore, we show that the direction of option trades (puts or calls) prior to an announcement can predict post-announcement stock returns. Our results also indicate that higher wealth-to-performance sensitivities of top executives are related to higher abnormal put option trading before stock merger announcements. Overall, our results support the view that top executives have a hedging motive. They tend to purchase protection against, e.g., confounding (negative) information policies and/or empire-building mergers with negative NPVs, in order to avoid short-term salary losses (lower bonuses, lower stock options, etc.). JEL Classification: D03, G14, G34, J3 Keywords: Compensation, Informed Trading, M&A, Option Implied Information, Wealth to Performance Sensitivity † Dr. Umut Ordu, WHU – Otto Beisheim School of Management, Chair of Empirical Capital Market Research, Burgplatz 2, 56179 Vallendar, Germany, e-mail: Umut.Ordu@whu.edu. ‡ Prof. Dr. Denis Schweizer, WHU – Otto Beisheim School of Management, Assistant Professor of Alternative Investments, Burgplatz 2, 56179 Vallendar, Germany, Phone: +49 261 - 6509 724, Fax: +49 261 - 6509 729 e-mail: Denis.Schweizer@whu.edu. Acknowledgements: We are grateful to Viral Acharya, Yakov Amihud, Christian Andres, Kee-Hong Bae, Dion Bongaerts, Archishman Chakraborty, Douglas Cumming, Ming Dong, Ulrich Hofbaur, Martin Jacob, Mark J. Kamstra, Christian Koziol, Dan Li, Ronald W. Masulis, Holger Müller, Maximilian Müller, Juliane Proelss, Oliver Randall, Jan-C. Rülke, Burcin Yurtoglu, Alexander F. Wagner, Josef Zechner, and Feng Zhan, as well as seminar participants at York University, the 16th Conference of the Swiss Society for Financial Markets (Zurich, Switzerland), and the 20th Annual Meeting of the German Finance Association (Wuppertal, Germany) for helpful comments and suggestions.