Option Backdating Announcements and Information Advantage of Institutional Investors

44 Pages Posted: 23 Oct 2014 Last revised: 26 Mar 2016

See all articles by Wenli Huang

Wenli Huang

Hong Kong Polytechnic University

Hai Lu

University of Toronto - Rotman School of Management

Xiaolu Wang

Iowa State University

Multiple version iconThere are 2 versions of this paper

Date Written: March 26, 2016

Abstract

This paper uses a unique transaction-level fund trading dataset to evaluate institutional investors’ trading performance. Our research design follows a two-step procedure. In the first stage, we identify funds that heavily sold shares in firms before their public revelation of stock option backdating investigations, and thus establish fund-firm pairs of interest. Results show that the funds earn more than 9% on their paired firms in the backdating event. In the second stage, we focus on trading that takes place at other times and find that the funds are more likely to make correct trades before the earnings announcements of their paired firms, and they trade more actively and perform better on these paired firms in general. However, the superior performance is evident only in the pre-backdating-announcement period. We interpret our results as evidence that institutions possess information advantage on their paired firms, but this advantage deteriorates following the backdating revelation.

Keywords: Information advantage, fund-firm pair, institutional investors, option backdating, earnings announcements

JEL Classification: M41, K22, G14, G38

Suggested Citation

Huang, Wenli and Lu, Hai and Wang, Xiaolu, Option Backdating Announcements and Information Advantage of Institutional Investors (March 26, 2016). Rotman School of Management Working Paper No. 2513688. Available at SSRN: https://ssrn.com/abstract=2513688 or http://dx.doi.org/10.2139/ssrn.2513688

Wenli Huang

Hong Kong Polytechnic University ( email )

School of Accounting and Finance
Hung Hom, Kow Loon, Hong Kong
Hong Kong

Hai Lu (Contact Author)

University of Toronto - Rotman School of Management ( email )

105 St. George Street
Toronto, Ontario M5S 3E6 M5S1S4
Canada

Xiaolu Wang

Iowa State University ( email )

613 Wallace Road
Ames, IA 50011-2063
United States

Register to save articles to
your library

Register

Paper statistics

Downloads
150
Abstract Views
1,492
rank
171,334
PlumX Metrics