Institutional Trading during a Wave of Corporate Scandals: 'Perfect Payday'?

47 Pages Posted: 11 Oct 2012 Last revised: 12 Nov 2013

See all articles by Gennaro (帅纳) Bernile

Gennaro (帅纳) Bernile

University of Miami - Department of Finance

Johan Sulaeman

National University of Singapore (NUS) - Department of Finance

Qin Emma Wang

Oklahoma State University - Tulsa

Date Written: August 1, 2013

Abstract

This paper examines the role of institutional trading during the option backdating scandal of 2006-2007. Unlike their inability to anticipate other corporate events, institutional investors as a group display negative abnormal trading imbalances (i.e., buy minus sell volumes) in anticipation of firm-specific backdating exposures. Consistent with informed trading, the underlying trades earn positive abnormal short- and long-term profits. Moreover, the negative abnormal imbalances are larger in magnitude when backdating is likely a more severe issue and manifest earlier ahead of firm-specific exposures as the scope of the scandal broadens. Local institutions, in particular, display negative trading imbalances earlier in event-time and earn consistently higher trading profits than non-local institutions. Although we find some evidence of over-reaction following the arrival of information about the backdating scandal, these patterns are short-lived and exclusively due to the activity of non-local institutions. Overall, institutions, particularly local ones, behave as informed investors during this prolonged period of heightened uncertainty about corporate reporting and governance practices.

JEL Classification: G11, G12, G14, G39, M41

Suggested Citation

Bernile, Gennaro (帅纳) and Sulaeman, Johan and Wang, Qin Emma, Institutional Trading during a Wave of Corporate Scandals: 'Perfect Payday'? (August 1, 2013). Available at SSRN: https://ssrn.com/abstract=2159779 or http://dx.doi.org/10.2139/ssrn.2159779

Gennaro (帅纳) Bernile

University of Miami - Department of Finance ( email )

P.O. Box 248094
Coral Gables, FL 33124-6552
United States

Johan Sulaeman

National University of Singapore (NUS) - Department of Finance ( email )

Mochtar Riady Building
15 Kent Ridge Drive
Singapore, 119245
Singapore

HOME PAGE: http://sites.google.com/site/johansulaeman/

Qin Emma Wang (Contact Author)

Oklahoma State University - Tulsa ( email )

Department of Finance
461 Business Building
Stillwater, OK 74078
United States
918-594-8394 (Phone)
918-594-8281 (Fax)

HOME PAGE: http://business.okstate.edu/directory/694480.html

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