Examining the Dark Side of Financial Markets: Do Institutions Trade on Information from Investment Bank Connections?

Review of Financial Studies, Forthcoming

50 Pages Posted: 22 Mar 2009 Last revised: 29 Mar 2012

John M. Griffin

University of Texas at Austin - Department of Finance

Tao Shu

University of Georgia - Department of Finance

Selim Topaloglu

Queen's University - Smith School of Business

Date Written: March 29, 2012

Abstract

Institutions often have access to corporate inside information through their connections, but relatively little is known about the extent to which they exploit their informational advantage through short-term trading. We employ broker-level trading data to systematically examine possible cases of connected trading. Despite examining the issue from multiple angles, we are unable to find much evidence to support that investment bank clients take advantage of connections through takeover advising, IPO and SEO underwriting, or lending relationships. In contrast to recent academic literature and popular press, our findings suggest that institutional investors are reluctant to use inside information in traceable manners.

Keywords: Institution, Informed, Trading, Short-Term, connections, earnings announcement, takeover

JEL Classification: G14, G20

Suggested Citation

Griffin, John M. and Shu, Tao and Topaloglu, Selim, Examining the Dark Side of Financial Markets: Do Institutions Trade on Information from Investment Bank Connections? (March 29, 2012). Review of Financial Studies, Forthcoming. Available at SSRN: https://ssrn.com/abstract=1363756 or http://dx.doi.org/10.2139/ssrn.1363756

John M. Griffin

University of Texas at Austin - Department of Finance ( email )

Red McCombs School of Business
Austin, TX 78712
United States
512-471-6621 (Phone)

HOME PAGE: http://www.jgriffin.info

Tao Shu (Contact Author)

University of Georgia - Department of Finance ( email )

Department of Finance
Terry College of Business, University of Georgia
Athens, GA 30602
United States

Selim Topaloglu

Queen's University - Smith School of Business ( email )

437 Goodes Hall
143 Union St.
Kingston, Ontario K7L 3N6
Canada
613-533-6573 (Phone)
613-533-2321 (Fax)

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