Despite abundant empirical evidence of informed trading ahead of major corporate events, no such evidence has been reported in the case of corporate spinoff (SP) announcements. This is surprising, as SP announcements are unexpected, and are also associated with a positive price jump in the parent company’s stock. Using a sample of 280 US announcement events from 1996 to 2013, we document significant pre-announcement informed trading activity in options for about 9 to 16% of events in our sample. In contrast, we find statistically insignificant evidence of informed trading in stocks, suggesting that informed traders employ leverage through options. In light of the mixed evidence about the effect of SP announcements on a parent firm’s credit risk and its debt, we also test for the existence of pre-announcement informed trading activity in bonds and credit default swaps, but find no support for such a conclusion.
Are Corporate Spin-offs Prone to Insider Trading?
We are grateful to Chirag Choksey for excellent research assistance. We thank Yakov Amihud, Vineet Bhagwat, Rohit Deo, Michael Goldstein, Kose John, April Klein, Wenlan Qian, David Reeb, David Yermack, and seminar participants at the 2014 OptionMetrics Research Conference, the NYU Stern Corporate Governance Luncheon, the National University of Singapore, McGill University, the Luxembourg School of Finance, the 2015 Lee Kong Chian School of Business Summer Finance Research Camp, the Ninth NUS-RMI Annual Risk Management in Singapore, the 2015 Northern Finance Association, ESCP Europe, and the CIFR Conference on the Design and Regulation of Securities Markets in Sydney for valuable feedback and discussions. This project received support from the Canada Social Sciences and Humanities Research Council grant 435-2016-1504, and the Chicago Mercantile Exchange. Augustin acknowledges financial support from the Institute of Financial Mathematics of Montreal (IFM2) and from the Canadian Derivatives Institute (CDI).
Augustin P, Brenner M, Hu J, Subrahmanyam MG (2020), "Are Corporate Spin-offs Prone to Insider Trading?". Critical Finance Review, Vol. 9 No. 1-2 pp. 115–155, doi: https://doi.org/10.1561/104.00000084
Download citation file:
Sign in
ICE Member Sign In
Log inPurchased this content as a guest? Enter your email address to restore access.
