Do Prices Reveal the Presence of Informed Trading?

45 Pages Posted: 16 Mar 2012 Last revised: 8 Sep 2015

Pierre Collin-Dufresne

Ecole Polytechnique Fédérale de Lausanne - Ecole Polytechnique Fédérale de Lausanne; National Bureau of Economic Research (NBER)

Vyacheslav Fos

Boston College - Department of Finance

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Date Written: January 27, 2015

Abstract

Using a comprehensive sample of trades from Schedule 13D filings by activist investors, we study how measures of adverse selection respond to informed trading. We find that on days when activists accumulate shares, measures of adverse selection and of stock illiquidity are lower, even though prices are positively impacted. Two channels help explain this phenomenon: (a) activists select times of higher liquidity when they trade, and (b) activists use limit orders. We conclude that when informed traders can select when and how to trade, standard measures of adverse selection may fail to capture the presence of informed trading.

Keywords: informed trading, liquidity, transaction costs, selection bias, activist shareholders

JEL Classification: G14

Suggested Citation

Collin-Dufresne, Pierre and Fos, Vyacheslav, Do Prices Reveal the Presence of Informed Trading? (January 27, 2015). Journal of Finance, Volume 70, Issue 4, August 2015, Pages 1555-1582. Available at SSRN: https://ssrn.com/abstract=2023629 or http://dx.doi.org/10.2139/ssrn.2023629

Pierre Collin-Dufresne

Ecole Polytechnique Fédérale de Lausanne - Ecole Polytechnique Fédérale de Lausanne ( email )

Quartier UNIL-Dorigny, Bâtiment Extranef, # 211
40, Bd du Pont-d'Arve
CH-1015 Lausanne, CH-6900
Switzerland

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Vyacheslav Fos (Contact Author)

Boston College - Department of Finance ( email )

Carroll School of Management
140 Commonwealth Avenue
Chestnut Hill, MA 02467-3808
United States

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