Option Backdating Announcements and Information Advantage of Institutional Investors

44 Pages Posted: 27 Jun 2018

See all articles by Wenli Huang

Wenli Huang

Hong Kong Polytechnic University

Hai Lu

University of Toronto - Rotman School of Management

Xiaolu Wang

Iowa State University

Multiple version iconThere are 2 versions of this paper

Date Written: June 12, 2018

Abstract

This paper uses transaction-level fund trading data from the United States to study the information advantage of institutional investors. Our research design follows a two-step procedure. In the first step, we identify funds that sell shares in firms before their unexpected revelation of stock option backdating investigations, and thus establish fund-firm pairs of interest. In the second step, we focus on trading that takes place at other times and find that the funds are more likely to make correct trades before the earnings announcements of their paired firms and that their trading performance for paired firms is better in general. This superior performance, however, is more evident in the pre-backdating-announcement period and for firms whose backdating investigations are initiated internally. The results imply that although institutions have access to private information on certain firms, this advantage disappears after the backdating revelation, possibly due to reduced information leakage.

Keywords: information advantage, fund-firm pair, connectedness, institutional investors, option backdating, earnings announcement

JEL Classification: M41, K22, G14, G38

Suggested Citation

Huang, Wenli and Lu, Hai and Wang, Xiaolu, Option Backdating Announcements and Information Advantage of Institutional Investors (June 12, 2018). Journal of Accounting, Auditing and Finance, Forthcoming. Available at SSRN: https://ssrn.com/abstract=3195029

Wenli Huang (Contact Author)

Hong Kong Polytechnic University ( email )

School of Accounting and Finance
Hung Hom, Kow Loon, Hong Kong
Hong Kong

Hai Lu

University of Toronto - Rotman School of Management ( email )

105 St. George Street
Toronto, Ontario M5S 3E6 M5S1S4
Canada

Xiaolu Wang

Iowa State University ( email )

613 Wallace Road
Ames, IA 50011-2063
United States

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