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How do insiders trade?
- We characterize how informed investors trade in the options market ahead of corporate news when they receive private, but noisy, information about (i) the timing of the announcement and (ii) its impact on stock prices. Our theoretical framework generates a rich set of predictions about the insiders’ behavior and their maximum expected returns. Three different analyses offer empirical support for our approach. First, predicted trades resemble illegal insider trades documented in SEC litigation cases with insiders being more likely to trade in options that offer higher expected returns. Second, pre-announcement patterns in unusual activity in the options market ahead of significant corporate news are consistent with the predictions of our framework. We employ our approach to characterize informed trading ahead of twelve different types of news including the announcement of earnings, corporate guidance, M&As, product innovations, management changes, and analyst recommendations. Third, to address concerns that pre-announcement patterns are driven by speculation, we show that measures capturing trading activity in call (put) options with high expected returns predict significant positive (negative) corporate news in the aggregate cross-section.
Author: | Patrick AugustinORCiD, Menachem Brenner, Gunnar Grass, Marti G. SubrahmanyamORCiDGND |
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URN: | urn:nbn:de:hebis:30:3-416804 |
URL: | http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2848989 |
Parent Title (English): | Center for Financial Studies (Frankfurt am Main): CFS working paper series ; No. 541 |
Series (Serial Number): | CFS working paper series (541) |
Publisher: | Center for Financial Studies |
Place of publication: | Frankfurt, M. |
Document Type: | Working Paper |
Language: | English |
Year of Completion: | 2016 |
Year of first Publication: | 2016 |
Publishing Institution: | Universitätsbibliothek Johann Christian Senckenberg |
Release Date: | 2016/10/18 |
Tag: | Corporate Announcements; Equity Options; Extreme Price Movements; Insider Trading; Market Microstructure |
HeBIS-PPN: | 390270938 |
Institutes: | Wirtschaftswissenschaften / Wirtschaftswissenschaften |
Wissenschaftliche Zentren und koordinierte Programme / Center for Financial Studies (CFS) | |
Dewey Decimal Classification: | 3 Sozialwissenschaften / 33 Wirtschaft / 330 Wirtschaft |
Sammlungen: | Universitätspublikationen |
Licence (German): | Deutsches Urheberrecht |