Insider Trading and Option Grant Timing in Response to Fire Sales (and Purchases) of Stocks by Mutual Funds

44 Pages Posted: 8 Mar 2010

See all articles by Ashiq Ali

Ashiq Ali

University of Texas at Dallas - Naveen Jindal School of Management

Yibin Zhou

University of Texas at Dallas - Naveen Jindal School of Management

Kelsey D. Wei

University of Texas at Dallas

Multiple version iconThere are 3 versions of this paper

Date Written: November 7, 2009

Abstract

Mutual funds experiencing large outflows (inflows) tend to decrease (expand) existing positions, creating downward (upward) price pressure in the stocks held in common by them (Coval and Stafford 2007). This study shows that corporate insiders exploit the resulting mispricing by buying (selling) their company’s stock if it is subject to such fire sales (purchases) by funds. This finding is robust to controlling for the overall mutual fund trading of the stock driven by factors other than extreme capital flows and other previously identified determinants of insider trades. Furthermore, this relation between mutual fund forced trading and insider trading is more pronounced for smaller and less liquid stocks.

We also show that influencing the timing of option grants is another channel through which insiders can exploit this type of mispricing in that the likelihood of option grants is greater for stocks that are under mutual fund fire sales. Finally, we show that both the insider trading and the option granting activities help speed up the price correction process because they significantly reduce the return reversals following mutual fund flow-driven trades through both direct liquidity provision and their signaling effect.

Overall, this study illustrates that insiders enhance personal benefits by trading on their personal account and influencing the timing of option grants in response to flow-driven fund trading. Moreover, these activities could contribute towards improving the informational efficiency of stock price.

Suggested Citation

Ali, Ashiq and Zhou, Yibin and Wei, Kelsey D., Insider Trading and Option Grant Timing in Response to Fire Sales (and Purchases) of Stocks by Mutual Funds (November 7, 2009). Available at SSRN: https://ssrn.com/abstract=1566535 or http://dx.doi.org/10.2139/ssrn.1566535

Ashiq Ali

University of Texas at Dallas - Naveen Jindal School of Management ( email )

800 West Campbell Road, SM41
Richardson, TX 75080-3021
United States
972-883-6360 (Phone)
972-883-6811 (Fax)

HOME PAGE: http://https://jindal.utdallas.edu/faculty/ashiq-ali

Yibin Zhou

University of Texas at Dallas - Naveen Jindal School of Management ( email )

2601 N. Floyd Road
Richardson, TX 75080
United States

Kelsey D. Wei (Contact Author)

University of Texas at Dallas ( email )

P.O. Box 830688
Richardson, TX 75083-0688
United States
9728835978 (Phone)

Do you have negative results from your research you’d like to share?

Paper statistics

Downloads
139
Abstract Views
1,728
Rank
117,361
PlumX Metrics