# Insider trading in the run-up to merger announcements. Before and after the UK's Financial Services Act 2012

**Authors:** Rebecaa Pham, Marcel Ausloos  
**arXiv:** [2012.11594](https://arxiv.org/abs/2012.11594)  
**Date:** 2020-12-19  
**Summary page:** https://www.summarizepaper.com/en/paper/2012.11594v1/

## Key points

- UK government recognized need for enhanced regulation post-2007/2008 financial crisis
- Development of Financial Services Act 2012 aimed to empower regulators with greater control
- Establishment of Financial Conduct Authority (FCA) to replace Financial Services Authority (FSA)
- Significant improvement in insider trading regulation needed
- Study conducted using event study methodology to analyze abnormal returns pre and post FCA implementation
- Notable reduction in abnormal returns after Financial Services Act 2012
- Higher stock price volatility before regulatory framework enactment, stabilized post-FCA implementation
- Insignificant abnormal returns detected during 2015-2019 period
- FCA effective in regulating insider trading within financial markets
- Transition from FSA to FCA positively impacted market behavior and regulatory environment

## Summary

The UK government recognized the need for enhanced regulation in the aftermath of the 2007/2008 financial crisis. This led to the development of the Financial Services Act 2012, which aimed to empower regulators with greater control and authority over financial markets. As a result, the Financial Conduct Authority (FCA) was established to replace its predecessor, the Financial Services Authority (FSA). One specific area that required significant improvement in regulation was insider trading. To assess the effectiveness of the FCA in regulating insider trading, a comprehensive study was conducted using event study methodology to analyze abnormal returns leading up to merger announcements. The study compared samples of abnormal returns during periods regulated by both the FSA and FCA. Stock price data from the London Stock Exchange spanning from 2008-2012 and 2015-2019 was meticulously examined. The findings revealed a notable reduction in abnormal returns following the implementation of the Financial Services Act 2012. Additionally, it was observed that stock prices exhibited higher levels of volatility before this regulatory framework's enactment. In contrast, insignificant abnormal returns were detected during the period from 2015-2019. These results suggest that the FCA has been effective in regulating insider trading within financial markets. The transition from FSA to FCA governance appears to have positively impacted market behavior and contributed to a more robust regulatory environment. Overall, this study underscores the importance of stringent regulation in maintaining market integrity and investor confidence.