Are Corporate Spin-Offs Prone to Insider Trading?
93 Pages Posted: 11 Feb 2015 Last revised: 1 Nov 2015
Date Written: October 30, 2015
Recent research has documented empirical evidence of informed trading ahead of major corporate events, including earnings announcements, mergers and acquisitions and corporate bankruptcies. However, no such evidence exists ahead of corporate spinoffs (SP). Using a sample of 426 corporate SPs from 1996 to 2013, we document pervasive informed activity in options of the parent company, but not in stocks. About 13% of all deals exhibit significant abnormal options volume in the pre-announcement period. The odds of abnormal options volume being greater in a control sample are about one in 4,000. High-frequency data confirm the presence of unusual net buying activity in the options market, but not the stock market, and abnormal options volume is the only robust predictor of abnormal announcement returns. SP announcements also generate negative abnormal bond returns. However, we find no evidence of informed trading in the fixed income market using bond and credit default swap data.
Keywords: Asymmetric Information, CDS, Corporate Bonds, Insider Trading, Spinoffs, Market Microstructure, Options, TRACE
JEL Classification: C1, C4, G13, G14, G34, G38, K22, K4
Suggested Citation: Suggested Citation