Are Corporate Spin-Offs Prone to Insider Trading?

93 Pages Posted: 11 Feb 2015 Last revised: 1 Nov 2015

See all articles by Patrick Augustin

Patrick Augustin

McGill University, Desautels Faculty of Management

Menachem Brenner

New York University (NYU) - Department of Finance

Jianfeng Hu

Singapore Management University - Lee Kong Chian School of Business

Marti G. Subrahmanyam

New York University (NYU) - Department of Finance

Date Written: October 30, 2015

Abstract

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

Augustin, Patrick and Brenner, Menachem and Hu, Jianfeng and Subrahmanyam, Marti G., Are Corporate Spin-Offs Prone to Insider Trading? (October 30, 2015). Available at SSRN: https://ssrn.com/abstract=2563012 or http://dx.doi.org/10.2139/ssrn.2563012

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)

Jianfeng Hu

Singapore Management University - Lee Kong Chian School of Business ( email )

50 Stamford Road
Singapore, 178899
Singapore
(+65) 68085477 (Phone)

Marti G. Subrahmanyam

New York University (NYU) - Department of Finance ( 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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