Do Prices Reveal the Presence of Informed Trading?
45 Pages Posted: 16 Mar 2012 Last revised: 8 Sep 2015
Date Written: January 27, 2015
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: Suggested Citation