Informed Options Trading Prior to M&A Announcements: Insider Trading?

117 Pages Posted: 26 May 2014 Last revised: 27 Oct 2015

Patrick Augustin

McGill University, Desautels Faculty of Management

Menachem Brenner

New York University (NYU) - Department of Finance

Marti G. Subrahmanyam

New York University - Stern School of Business

Date Written: October 26, 2015

Abstract

We document pervasive informed trading activity in equity options before M&A announcements. About 25% of takeovers have positive abnormal volumes. These volume patterns indicate that informed traders are likely using bullish directional strategies for the target and volatility strategies for the acquirer. We show that this abnormal activity cannot be explained by deal predictability, speculation, news and rumors, trading of corporate insiders, or leakage in the stock market. While the SEC litigates only about 7% of deals in our sample, the characteristics of illegal option trades before M&A announcements they prosecute closely resemble the documented patterns of unusual options activity.

Keywords: Asymmetric Information, Civil Litigations, Insider Trading, Mergers and Acquisitions, Market Microstructure, Equity Options, SEC

JEL Classification: C1, C4, G13, G14, G34, G38, K22, K41

Suggested Citation

Augustin, Patrick and Brenner, Menachem and Subrahmanyam, Marti G., Informed Options Trading Prior to M&A Announcements: Insider Trading? (October 26, 2015). Available at SSRN: https://ssrn.com/abstract=2441606 or http://dx.doi.org/10.2139/ssrn.2441606

Patrick Augustin (Contact Author)

McGill University, Desautels Faculty of Management ( email )

1001 Sherbrooke Street West
Quebec
Montreal, Quebec H3A 1G5
Canada

HOME PAGE: http://www.patrickaugustin.se

Menachem Brenner

New York University (NYU) - Department of Finance ( email )

Stern School of Business
44 West 4th Street
New York, NY 10012-1126
United States
212-998-0323 (Phone)
212-995-4233 (Fax)

Marti G. Subrahmanyam

New York University - Stern School of Business ( email )

Stern School of Business,
44 West 4th Street, Suite 9-68
New York, NY 10012-1126
United States
212-998-0348 (Phone)
212-995-4233 (Fax)

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