Are Corporate Spin-Offs Prone to Insider Trading?

41 Pages Posted: 11 Feb 2015 Last revised: 26 Feb 2020

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

Despite abundant empirical evidence of informed trading ahead of major corporate events, no such evidence has been reported in the case of corporate spinoff (SP) announcements. This is surprising, as SP announcements are unexpected, and are also associated with a positive price jump in the parent company’s stock. Using a sample of 280 US announcement events from 1996 to 2013, we document significant pre-announcement informed trading activity in options for about 9 to 16% of events in our sample. In contrast, we find statistically insignificant evidence of informed trading in stocks, suggesting that informed traders employ leverage through options. In light of the mixed evidence about the effect of SP announcements on a parent firm’s credit risk and its debt, we also test for the existence of preannouncement informed trading activity in bonds and credit default swaps, but find no support for such a conclusion.

Keywords: Capital Structure, Derivatives, Options, SEC

JEL Classification: D82, G14, G34, K22, K41

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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