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

journal contribution
posted on 01.12.2013, 00:00 authored by Edward PodolskiEdward Podolski, C Truong, M Veeraraghavan
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.

History

Journal

Journal of international financial markets, institutions and money

Volume

27

Issue

1

Pagination

286 - 305

Publisher

Elsevier

Location

Amsterdam, The Netherlands

ISSN

1042-4431

Language

eng

Publication classification

C1.1 Refereed article in a scholarly journal; C Journal article

Copyright notice

2013, Elsevier B.V.

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