High-Frequency Measures of Informed Trading and Corporate Announcements

Review of Financial Studies, Forthcoming

Institute of Global Finance Working Paper No. 2

73 Pages Posted: 15 Mar 2015 Last revised: 25 Dec 2017

See all articles by Michael J. Brennan

Michael J. Brennan

University of California, Los Angeles (UCLA) - Finance Area

Sahn-Wook Huh

State University of New York (SUNY) - Department of Finance

Avanidhar Subrahmanyam

University of California, Los Angeles (UCLA) - Finance Area; Institute of Global Finance, UNSW Business School; Financial Research Network (FIRN)

Date Written: December 7, 2017

Abstract

We study informed trading around announcements of merger bids (M&AD) and quarterly earnings (EAD). Extending the EKOP (1996) approach, we compute the daily posterior probabilities of informed trading on good and bad news. We find evidence of informed trading before and after M&AD and EAD. A significant part of the merger bid premium is impounded in stock prices prior to the announcement by informed buying. Post-M&AD informed trading predicts subsequent stock returns and the probabilities that the bid will be withdrawn or met with a competing bid. Pre-EAD informed trading also attenuates the price response to the announcement, and post-EAD informed trading predicts subsequent stock returns.

Keywords: High-Frequency Measures of Information Asymmetry; Daily Conditional Probability of Informed Trading; Good- and Bad-News Components; Earnings Surprises; CAR; SUE

JEL Classification: G12

Suggested Citation

Brennan, Michael John and Huh, Sahn-Wook and Subrahmanyam, Avanidhar, High-Frequency Measures of Informed Trading and Corporate Announcements (December 7, 2017). Review of Financial Studies, Forthcoming; Institute of Global Finance Working Paper No. 2. Available at SSRN: https://ssrn.com/abstract=2578168 or http://dx.doi.org/10.2139/ssrn.2578168

Michael John Brennan

University of California, Los Angeles (UCLA) - Finance Area ( email )

Los Angeles, CA 90095-1481
United States
310-825 3587 (Phone)
310-206 8419 (Fax)

Sahn-Wook Huh (Contact Author)

State University of New York (SUNY) - Department of Finance ( email )

347 Jacobs Management Center
Buffalo, 14260-4000
United States
716-645-5435 (Phone)
716-645-3823 (Fax)

HOME PAGE: https://sites.google.com/site/sahnwookhuh/home

Avanidhar Subrahmanyam

University of California, Los Angeles (UCLA) - Finance Area ( email )

Los Angeles, CA 90095-1481
United States
310-825-5355 (Phone)
310-206-5455 (Fax)

Institute of Global Finance, UNSW Business School

Sydney, NSW 2052
Australia

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

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