Toeing the Informed Trading Line

73 Pages Posted: 5 Sep 2018 Last revised: 8 May 2019

See all articles by Harvey Cheong

Harvey Cheong

Energy Market Authority

Joon Ho Kim

University of Hawaii at Manoa

Harold D. Spilker III

University Of Hawaii At Manoa, Shidler College of Business

Florian Münkel

Saint Mary's University, Sobey School of Business

Date Written: May 3, 2019

Abstract

This paper investigates how personal connections facilitate informed option trading prior to corporate events. We identify person-to-person connections between hedge funds and companies before merger and acquisitions announcements and find that fund managers’ pre-announcement option holdings predict the direction and size of the acquirers’ stock return. This return predictability is more pronounced when connections form through funds’ senior officials, Ivy League networks, and MBA programs, thus highlighting the importance of fund managers’ ability to access and process private information for informed trading. For regulators, our results identify a channel for material private information dissemination between network participants.

Keywords: Informed Trading, Insider Trading, Social Networks, Hedge Funds, M&A, Options

JEL Classification: D82, G11, G12, G14, G34, Z13

Suggested Citation

Cheong, Harvey and Kim, Joon Ho and Spilker III, Harold D. and Münkel, Florian, Toeing the Informed Trading Line (May 3, 2019). Available at SSRN: https://ssrn.com/abstract=3239708 or http://dx.doi.org/10.2139/ssrn.3239708

Harvey Cheong

Energy Market Authority ( email )

991G Alexandra Road #01-29
Singapore, 119975
Singapore

Joon Ho Kim

University of Hawaii at Manoa ( email )

2404 Maile Way
Honolulu, HI 96822
United States

Harold D. Spilker III (Contact Author)

University Of Hawaii At Manoa, Shidler College of Business ( email )

2404 Maile Way
Honolulu, HI 96822
United States
8089568738 (Phone)

Florian Münkel

Saint Mary's University, Sobey School of Business ( email )

923 Robie St.
Halifax, Nova Scotia B3H 3C3
Canada

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