Informed Trading and Price Discovery before Corporate Events

63 Pages Posted: 3 Jul 2013 Last revised: 19 Aug 2016

See all articles by Shmuel Baruch

Shmuel Baruch

University of Utah - Department of Finance

Marios A. Panayides

University of Cyprus - Department of Accounting and Finance; University of Pittsburgh - Katz Graduate School of Business

Kumar Venkataraman

Southern Methodist University (SMU) - Finance Department

Date Written: June 27, 2016

Abstract

Stock prices incorporate less “news” before negative events than positive events. Further, we find evidence that informed agents use less price aggressive (limit) orders before negative events and more price aggressive (market) orders before positive events ("buy-sell asymmetry"). Motivated by these patterns, we model the execution risk that informed agents impose on each other and relate the asymmetry to costly short selling. When investor base is narrow, security borrowing is difficult, or the magnitude of the event is small, buy-sell asymmetry is pronounced and price discovery before negative events is lower. Overall, informed agents' strategies influence the process of price formation in financial markets, as predicted by theory.

Keywords: Informed trader; insider trading; trading strategy; short sale; buy-sell asymmetry

JEL Classification: G11, G12, G14, G18

Suggested Citation

Baruch, Shmuel and Panayides, Marios A. and Venkataraman, Kumar, Informed Trading and Price Discovery before Corporate Events (June 27, 2016). Journal of Financial Economics (JFE), Forthcoming. Available at SSRN: https://ssrn.com/abstract=2288914 or http://dx.doi.org/10.2139/ssrn.2288914

Shmuel Baruch

University of Utah - Department of Finance ( email )

David Eccles School of Business
Salt Lake City, UT 84112
United States

Marios A. Panayides

University of Cyprus - Department of Accounting and Finance ( email )

University of Cyprus
P.O. Box 20537
Nicosia, CY-1678
Cyprus

University of Pittsburgh - Katz Graduate School of Business ( email )

372 Mervis Hall
Pittsburgh, PA 15260
United States

Kumar Venkataraman (Contact Author)

Southern Methodist University (SMU) - Finance Department ( email )

United States
214-768-7005 (Phone)
214-768-4099 (Fax)

HOME PAGE: http://people.smu.edu/kumar/

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