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

Podolski, Edward J., Truong, Cameron and Veeraraghavan, Madhu 2013, Informed options trading prior to takeovers - Does the regulatory environment matter?, Journal of international financial markets, institutions and money, vol. 27, no. 1, pp. 286-305, doi: 10.1016/j.intfin.2013.09.001.

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Title Informed options trading prior to takeovers - Does the regulatory environment matter?
Author(s) Podolski, Edward J.ORCID iD for Podolski, Edward J.
Truong, Cameron
Veeraraghavan, Madhu
Journal name Journal of international financial markets, institutions and money
Volume number 27
Issue number 1
Start page 286
End page 305
Total pages 20
Publisher Elsevier
Place of publication Amsterdam, The Netherlands
Publication date 2013-12
ISSN 1042-4431
Summary 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.
Language eng
DOI 10.1016/j.intfin.2013.09.001
Field of Research 150201 Finance
1502 Banking, Finance And Investment
1402 Applied Economics
Socio Economic Objective 970115 Expanding Knowledge in Commerce
HERDC Research category C1.1 Refereed article in a scholarly journal
ERA Research output type C Journal article
Copyright notice ©2013, Elsevier B.V.
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Document type: Journal Article
Collections: Faculty of Business and Law
Department of Finance
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