Informed Options Trading Prior to Takeovers – Does the Regulatory Environment Matter?

38 Pages Posted: 9 Jan 2011 Last revised: 13 May 2014

See all articles by Edward Podolski

Edward Podolski

Deakin University; Financial Research Network (FIRN)

Cameron Truong

Monash University; Financial Research Network (FIRN)

Madhu Veeraraghavan

T.A. PAI Management Institute, Finance Area

Date Written: December 1, 2013

Abstract

We investigate the prevalence of informed options trading prior to takeover announcements, when the legal prohibition against insider trading is strictest. Although insider trading laws apply equally to the options and stock markets, the options market is considerably more transparent than the equity market, which makes insider trading in options more easily detectable. We find that privately informed investors trade in the options market prior to takeover announcements; however, their transactions are limited to liquid call options and options with high inherent leverage. Furthermore, we find that prior to takeover announcements, informed investors trade on their private information in the options market only when a SEC investigation of insider trading is unlikely to occur. Our results suggest that even prior to takeover announcements informed investors are attracted to the options market, which increases profit making potential due the greater leverage it affords, although they trade in a way which minimizes the likelihood of detection.

Keywords: Takeovers, Informed trading, Market efficiency, Market regulation

JEL Classification: G14, G30, G34

Suggested Citation

Podolski, Edward and Truong, Cameron and Veeraraghavan, Madhu, Informed Options Trading Prior to Takeovers – Does the Regulatory Environment Matter? (December 1, 2013). Journal of International Financial Markets, Institutions and Money, Vol. 27, No. 1, 2013, Available at SSRN: https://ssrn.com/abstract=1737162 or http://dx.doi.org/10.2139/ssrn.1737162

Edward Podolski

Deakin University ( email )

221 Burwood Highway
Burwood, Victoria 3125
Australia

Financial Research Network (FIRN) ( email )

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

Cameron Truong

Monash University ( email )

23 Innovation Walk
Wellington Road
Clayton, Victoria 3800
Australia

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

HOME PAGE: http://www.firn.org.au

Madhu Veeraraghavan (Contact Author)

T.A. PAI Management Institute, Finance Area ( email )

Bangalore
Manipal, Karnataka 576104
India
+91-820-2701030 (Phone)

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