Do Social Networks Facilitate Informed Option Trading? Evidence from Alumni Reunion Networks
Journal of Financial and Quantitative Analysis (Forthcoming)
74 Pages Posted: 2 Mar 2021 Last revised: 6 Mar 2021
Date Written: February 27, 2021
Material private information transmits through social networks. Using manually collected information on networks of alumni reunion cohorts, we show that hedge fund managers connected to directors of firms engaged in merger deals increase call option holdings on target firms before deal announcements. Effects are larger when reunion events for connected cohorts occur just before announcements. Independent directors, directors with short tenure, and directors with low stock ownership are more likely to transmit information. Our results are robust to confounding factors and alternative specifications. These findings highlight the role of social networks as channels of private information dissemination.
Keywords: Informed Trading, Social Networks, Hedge Funds, Mergers & Acquisitions, Options
JEL Classification: D82, G11, G12, G14, G34, L14, Z13
Suggested Citation: Suggested Citation