High-Frequency Measures of Informed Trading and Corporate Announcements

We study informed trading around announcements of merger bids (M&AD) and quarterly earnings (EAD). Extending the EKOP (1996) approach, we compute the daily posterior probabilities of informed trading on good and bad news. We find evidence of informed trading before and after M&AD and EAD. A significant part of the merger bid premium is impounded in stock prices prior to the announcement by informed buying. Post-M&AD informed trading predicts subsequent stock returns and the probabilities that the bid will be withdrawn or met with a competing bid. Pre-EAD informed trading also attenuates the price response to the announcement, and post-EAD informed trading predicts subsequent stock returns.

Keywords: High-Frequency Measures of Information Asymmetry; Daily Conditional Probability of Informed Trading; Good- and Bad-News Components; Earnings Surprises; CAR; SUE

JEL Classification: G12

Suggested Citation: Suggested Citation

Brennan, Michael John and Huh, Sahn-Wook and Subrahmanyam, Avanidhar, High-Frequency Measures of Informed Trading and Corporate Announcements (December 7, 2017). Review of Financial Studies, Forthcoming, Institute of Global Finance Working Paper No. 2, Available at SSRN: https://ssrn.com/abstract=2578168 or http://dx.doi.org/10.2139/ssrn.2578168