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research-article

Informed Options Trading Prior to Takeover Announcements: : Insider Trading?

Authors:

Patrick Augustin,

Menachem Brenner,

Marti G. SubrahmanyamAuthors Info & Claims

Management Science, Volume 65, Issue 12

Pages 5697 - 5720

https://doi.org/10.1287/mnsc.2018.3122

Published: 01 December 2019 Publication History

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.

This paper was accepted by Lauren Cohen, finance.

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Cited By

Weinbaum DFodor AMuravyev DCremers M(2023)Option Trading Activity, News Releases, and Stock Return PredictabilityManagement Science10.1287/mnsc.2022.454369:8(4810-4827)Online publication date: 1-Aug-2023
https://dl.acm.org/doi/10.1287/mnsc.2022.4543
Heitzman SKlasa S(2021)Informed Trading Reactions to New Private InformationManagement Science10.1287/mnsc.2020.362967:4(2630-2656)Online publication date: 1-Apr-2021
https://dl.acm.org/doi/10.1287/mnsc.2020.3629

Index Terms

Informed Options Trading Prior to Takeover Announcements: Insider Trading?
1. Applied computing
  1. Enterprise computing
    1. Business process management
  2. Law, social and behavioral sciences
    1. Economics

Index terms have been assigned to the content through auto-classification.

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Information & Contributors

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Published In

cover image Management Science

Management Science Volume 65, Issue 12

December 2019

508 pages

ISSN:0025-1909

DOI:10.1287/mnsc.2019.65.issue-12

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Copyright © 2019, INFORMS.

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INFORMS

Linthicum, MD, United States

Publication History

Published: 01 December 2019

Accepted: 08 April 2018

Received: 03 December 2015

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Cited By

Weinbaum DFodor AMuravyev DCremers M(2023)Option Trading Activity, News Releases, and Stock Return PredictabilityManagement Science10.1287/mnsc.2022.454369:8(4810-4827)Online publication date: 1-Aug-2023
https://dl.acm.org/doi/10.1287/mnsc.2022.4543
Heitzman SKlasa S(2021)Informed Trading Reactions to New Private InformationManagement Science10.1287/mnsc.2020.362967:4(2630-2656)Online publication date: 1-Apr-2021
https://dl.acm.org/doi/10.1287/mnsc.2020.3629

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