Informed Options Trading Prior to Takeover Announcements: Insider Trading?

Patrick Augustin (), Menachem Brenner () and Marti G. Subrahmanyam ()
Additional contact information
Patrick Augustin: Desautels Faculty of Management, McGill University, Montreal, Quebec H3A 1G5, Canada
Menachem Brenner: Leonard N. Stern School of Business, New York University, New York, New York 10012
Marti G. Subrahmanyam: Leonard N. Stern School of Business, New York University, New York, New York 10012

Management Science, 2019, vol. 65, issue 12, 5697-5720

Abstract: 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.

Keywords: civil litigations; derivatives; insider trading; mergers and acquisitions; SEC (search for similar items in EconPapers)
Date: 2019
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (35)

Downloads: (external link)
https://doi.org/10.1287/mnsc.2018.3122 (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:inm:ormnsc:v:65:y:2019:i:12:p:5697-5720

Access Statistics for this article

More articles in Management Science from INFORMS Contact information at EDIRC.
Bibliographic data for series maintained by Chris Asher ().