Illegal insider trading ahead of takeovers is no more of a problem in Canada than it is in the United States, according to new research from The Bank of Canada.

“We find evidence of pre-bid run-ups in a sample of 420 Canadian takeovers, consistent with similar studies of U.S. takeovers. In our study, pre-bid run-ups occurred shortly before the first public announcement and were of comparable magnitude to the run-ups ahead of U.S. takeovers,” the Bank reports in the December issue of its Financial System Review.

“Based on the pattern of run-ups, the absence of abnormal trading volumes on days with abnormal price movements, and the timing of the run-up shortly before the announcement date, we conclude that pre-bid run-ups are consistent with market anticipation and reject an explanation based on information leakage from illegal insider trading,” it concludes. “This study suggests that Canadian equity markets are efficient, and does not support the view that Canada has a greater problem with insider trading than the United States.”

In other papers also published in the FSR, the Bank looks at the causes of common movements in international stock markets, the development of the Canadian hedge fund industry, and the likely increased volatility of bank capital under more risk-sensitive Basel II capital requirements.