Are Informed Traders Sensitive to Regulatory Environments?
European Journal of Finance, Forthcoming
37 Pages Posted: 20 Dec 2013 Last revised: 7 Jul 2014
Date Written: July 7, 2014
This article empirically analyses how investors with private material information decide in which regulatory regime, set by governments in different countries, to trade. We study put-call deviations (which indicate informed trading) for options written solely on U.S.-listed companies and for those with dual listings / headquarter in China. We argue that informed traders actively choose the regulatory regime with the lowest level of regulatory rigorousness in order to exploit private information. We find that the informational content of put-call parity deviations is detectable for companies listed solely in the U.S., but not for Chinese companies. Our evidence suggests that informed traders do not tend to exploit their private information where regulatory rigorousness is high (e.g., a high likelihood of detection and subsequent enforcement). They will instead opt to trade where regulatory rigorousness is low.
Keywords: China, Informed Trading, Market Segmentation, Put-Call Parity
JEL Classification: C10, G14, G15, N25
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