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.

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Metadaten
Author:Patrick AugustinORCiD, Menachem Brenner, Gunnar Grass, Marti G. SubrahmanyamORCiDGND
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):License LogoDeutsches Urheberrecht