How does divergence of opinions affect the relative trading activity and information content in option and stock prior to takeover announcement?

Huang, Han-Ching; Tung, Pei-Shan

doi:10.1016/j.qref.2015.10.007

The Quarterly Review of Economics and Finance

2016

DOI: 10.1016/j.qref.2015.10.007

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How does divergence of opinions affect the relative trading activity and information content in option and stock prior to takeover announcement?

Han-Ching Huang

Pei-Shan Tung

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Cited by 3 publications

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“…Additional results support the conclusion that the observed trading activity is informed.8 Chan, Ge & Lin (2015) also provide evidence for preannouncement informed options activity for a subsample of 2,372 target deals, but their focus is on acquirers. Readers are referred toHuang & Tung (2016) for evidence on acquirers. In their working paper version,Augustin, Brenner & Subrahmanyam (2019) consider that informed investors implement nondirectional volatility strategies using the options of acquirer firms, since the reaction of acquirer stock returns to merger news bears a significant amount of nondirectional uncertainty.…”

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Informed Options Trading Before Corporate Events

Augustin

Subrahmanyam

2020

Annu. Rev. Financ. Econ.

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There is sufficient evidence in the popular, legal, and financial literatures that informed options trading ahead of scheduled and unexpected corporate events is pervasive. In this review, we piece together the extant evidence on this topic into a cohesive picture, which includes abnormal activity ahead of announcements of earnings, mergers and acquisitions, as well as numerous other corporate events. We also discuss the more limited evidence on informed trading in other derivatives markets, such as credit default swaps. In addition, we characterize the impact and features of illegal insider trading and insider trading networks. We also provide a brief overview of the legal framework in the United States concerning legal and illegal insider trading to emphasize the challenges associated with identifying informed options trading. We end with our suggestions regarding future research opportunities in this broad topic.

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Informed Options Trading Before Corporate Events

Augustin

Subrahmanyam

2020

Annu. Rev. Financ. Econ.

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Informed Options Trading Prior to Takeover Announcements: Insider Trading?

2019

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We quantify the pervasiveness of informed trading activity in target companies’ equity options before the announcements of 1,859 U.S. takeovers between 1996 and 2012. About 25% of all takeovers have positive abnormal volumes, which are greater for short-dated, out-of-the-money calls, consistent with bullish directional trading before the announcement. Over half of this abnormal activity is unlikely due to speculation, news and rumors, trading by corporate insiders, leakage in the stock market, deal predictability, or beneficial ownership filings by activist investors. We also examine the characteristics of option trades litigated by the Securities and Exchange Commission (SEC) for alleged illegal insider trading. Although the characteristics of such trades closely resemble the patterns of abnormal option volume in the U.S. takeover sample, we find that the SEC litigates only about 8% of all deals in it. This paper was accepted by Lauren Cohen, finance.

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Informed Options Trading Prior to M&A Announcements: Insider Trading?

et al. 2014

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How does divergence of opinions affect the relative trading activity and information content in option and stock prior to takeover announcement?

Cited by 3 publications

References 25 publications

Informed Options Trading Before Corporate Events

Informed Options Trading Before Corporate Events

Informed Options Trading Prior to Takeover Announcements: Insider Trading?

Informed Options Trading Prior to M&A Announcements: Insider Trading?

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