Do Prices Reveal the Presence of Informed Trading?

Pierre Collin-Dufresne and Vyacheslav Fos
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Pierre Collin-Dufresne: Ecole Polytechnique Fédérale de Lausanne; Swiss Finance Institute; National Bureau of Economic Research (NBER)
Vyacheslav Fos: Boston College - Department of Finance; European Corporate Governance Institute (ECGI); Centre for Economic Policy Research (CEPR)

No 13-69, Swiss Finance Institute Research Paper Series from Swiss Finance Institute

Abstract: Using a comprehensive sample of trades from Schedule 13D filings by activist investors, we study how measures of adverse selection respond to informed trading. We find that on days when activists accumulate shares, measures of adverse selection and of stock illiquidity are lower, even though prices are positively impacted. Two channels help explain this phenomenon: (a) activists select times of higher liquidity when they trade, and (b) activists use limit orders. We conclude that when informed traders can select when and how to trade, standard measures of adverse selection may fail to capture the presence of informed trading.

Keywords: informed trading; liquidity; transaction costs; selection bias; activist shareholders (search for similar items in EconPapers)
JEL-codes: G14 (search for similar items in EconPapers)
Pages: 45 pages
Date: 2013-12, Revised 2015-09
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Citations: View citations in EconPapers (125)

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Persistent link: https://EconPapers.repec.org/RePEc:chf:rpseri:rp1369

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