Institutional trading during a wave of corporate scandals: “Perfect Payday”?

Gennaro Bernile, Johan Sulaeman and Qin Wang

Journal of Corporate Finance, 2015, vol. 34, issue C, 191-209

Abstract: This paper examines the role of institutional trading during the option backdating scandal of 2006–2007. Unlike their inability to anticipate other corporate events, institutional investors as a group display negative abnormal trading imbalances (i.e., buy minus sell volumes) in anticipation of firm-specific backdating exposures. Consistent with informed trading, the underlying trades earn positive abnormal short- and long-term profits. Moreover, the negative abnormal imbalances are larger in magnitude when backdating is likely a more severe issue. Local institutions, in particular, display negative trading imbalances earlier in event-time and earn consistently higher trading profits than non-local institutions. Although we find some evidence of over-reaction following the arrival of information about the backdating scandal, these patterns are short-lived and exclusively due to the activity of non-local institutions. Overall, institutional investors behave as informed investors, particularly in local stocks, during this prolonged period of heightened uncertainty about corporate reporting and governance practices.

Keywords: Institutional investors; Trading; Scandal; Option backdating; Local investors (search for similar items in EconPapers)
JEL-codes: G11 G12 G14 G39 M41 (search for similar items in EconPapers)
Date: 2015
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (20)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:corfin:v:34:y:2015:i:c:p:191-209

DOI: 10.1016/j.jcorpfin.2015.07.004

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