Informed Trading Around Stock Split Announcements: Evidence from the Option Market

68 Pages Posted: 12 Oct 2015

Date Written: October 12, 2015

Abstract

Prior research shows that splitting firms earn positive abnormal returns and that they experience an increase in stock return volatility. By examining option-implied volatility, we assess option traders’ perceptions on return and volatility changes arising from stock splits. We find that they do expect higher volatility following splits. There is only weak evidence though of option traders anticipating an abnormal increase in stock prices. We also show that our option measures can predict both stock volatility levels and changes after the announcement. However, there is little evidence that they can predict the returns of splitting firms.

Keywords: option traders, implied volatility, event study

JEL Classification: G11, G12, G13, G14

Suggested Citation

Gharghori, Philip and Maberly, Edwin D. and Nguyen, Annette, Informed Trading Around Stock Split Announcements: Evidence from the Option Market (October 12, 2015). Journal of Financial and Quantitative Analysis (JFQA), Forthcoming. Available at SSRN: https://ssrn.com/abstract=2672752

Philip Gharghori (Contact Author)

Monash University ( email )

Wellington Road
Melbourne, 3800
Australia
+61399059247 (Phone)

HOME PAGE: http://research.monash.edu/en/persons/philip-gharghori

Edwin D. Maberly

Monash University ( email )

Clayton Campus
Wellington Road
Clayton, VIC 3800
Australia
61399055178 (Phone)

Annette Nguyen

Deakin University ( email )

75 Pigdons Road
Victoria, Victoria 3216
Australia

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