Option Backdating Announcements and Information Advantage of Institutional Investors
44 Pages Posted: 27 Jun 2018
Date Written: June 12, 2018
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
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