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Informed options trading prior to takeovers – Does the regulatory environment matter?

Edward Podolski (), Cameron Truong and Madhu Veeraraghavan

Journal of International Financial Markets, Institutions and Money, 2013, vol. 27, issue C, 286-305

Abstract: We investigate the prevalence of informed options trading prior to takeover announcements, when the legal prohibition against insider trading is strictest. Although insider trading laws apply equally to the options and stock markets, the options market is considerably more transparent than the equity market, which makes insider trading in options more easily detectable. We find that privately informed investors trade in the options market prior to takeover announcements; however, their transactions are limited to liquid call options and options with high inherent leverage. Furthermore, we find that prior to takeover announcements, informed investors trade on their private information in the options market only when a SEC investigation of insider trading is unlikely to occur. Our results suggest that even prior to takeover announcements informed investors are attracted to the options market, which increases profit making potential due the greater leverage it affords, although they trade in a way which minimizes the likelihood of detection.

Keywords: Takeovers; Informed trading; Market efficiency; Market regulation (search for similar items in EconPapers)
JEL-codes: G14 G30 G34 (search for similar items in EconPapers)
Date: 2013
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DOI: 10.1016/j.intfin.2013.09.001

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Journal of International Financial Markets, Institutions and Money is currently edited by I. Mathur and C. J. Neely

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