Informational Content of Options Trading on Acquirer Announcement Return
64 Pages Posted: 15 Jul 2013 Last revised: 2 Sep 2013
Date Written: September 2, 2013
This study examines the informational content of options trading on acquirer announcement returns. We show that implied volatility spread predicts positively on the cumulative abnormal return (CAR), and implied volatility skew predicts negatively on the CAR. The predictability is much stronger around actual merger and acquisition (M&A) announcement days, compared with pseudo-event days. The prediction is weaker if pre-M&A stock price has incorporated part of the information, but stronger if acquirer’s options trading is more liquid. Finally, we find that higher relative trading volume of options to stock predicts higher absolute CARs. The relation also exists among the target firms.
Keywords: Merger and Acquisition, Acquirer, Informed Trading, Implied Volatility Spread, Implied Volatility Skew
JEL Classification: G12, G14, G34
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