Informed Trading and Price Discovery before Corporate Events

Baruch, Shmuel; Panayides, Marios A.; Venkataraman, Kumar

doi:10.2139/ssrn.2288914

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Informed Trading and Price Discovery before Corporate Events

Journal of Financial Economics (JFE), Forthcoming

63 Pages Posted: 3 Jul 2013 Last revised: 29 Jul 2016

See all articles by Shmuel Baruch

Marios A. Panayides

University of Oklahoma; affiliation not provided to SSRN

Kumar Venkataraman

Southern Methodist University (SMU) - Finance Department

Date Written: June 27, 2016

Abstract

Stock prices incorporate less “news” before negative events than positive events. Further, we find evidence that informed agents use less price aggressive (limit) orders before negative events and more price aggressive (market) orders before positive events ("buy-sell asymmetry"). Motivated by these patterns, we model the execution risk that informed agents impose on each other and relate the asymmetry to costly short selling. When investor base is narrow, security borrowing is difficult, or the magnitude of the event is small, buy-sell asymmetry is pronounced and price discovery before negative events is lower. Overall, informed agents' strategies influence the process of price formation in financial markets, as predicted by theory.

Keywords: Informed trader; insider trading; trading strategy; short sale; buy-sell asymmetry

JEL Classification: G11, G12, G14, G18

Suggested Citation: Suggested Citation

Baruch, Shmuel and Panayides, Marios A. and Panayides, Marios A. and Venkataraman, Kumar, Informed Trading and Price Discovery before Corporate Events (June 27, 2016). Journal of Financial Economics (JFE), Forthcoming, Available at SSRN: https://ssrn.com/abstract=2288914 or http://dx.doi.org/10.2139/ssrn.2288914