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Informational Content of Option Volume Prior to Takeovers

58 Pages Posted: 27 Oct 2003  

Charles Cao

Pennsylvania State University

John M. Griffin

University of Texas at Austin - Department of Finance

Zhiwu Chen

University of Hong Kong; Yale University - International Center for Finance; Zebra Capital Management, LLC

Date Written: September 2003

Abstract

This paper examines the information embedded in both the stock and option markets prior to takeover announcements. During normal periods, buyer-seller initiated stock volume imbalances are significant predictors of next-day stock returns and option volume imbalances are uninformative. However, prior to takeover announcements, call volume imbalances are strongly positively related to next-day stock returns. Cross-sectional analysis shows that those takeover targets with the largest
pre-announcement call-imbalance increases experience the highest announcement-day returns. The largest increase in
buyer-initiated trading activity is in short-term
out-of-the-money calls that subsequently experience the largest returns. Collectively, these findings are consistent with the hypothesis that, in the presence of pending extreme informational events, the options market plays an important role in price discovery.

Suggested Citation

Cao, Charles and Griffin, John M. and Chen, Zhiwu, Informational Content of Option Volume Prior to Takeovers (September 2003). Yale SOM Working Paper No. ES-31. Available at SSRN: https://ssrn.com/abstract=445320

Charles Cao (Contact Author)

Pennsylvania State University ( email )

Department of Finance
Smeal College of Business
University Park, PA 16802
United States
814-865-7891 (Phone)
814-865-3362 (Fax)

HOME PAGE: http://www.personal.psu.edu/qxc2/cao.html

John M. Griffin

University of Texas at Austin - Department of Finance ( email )

Red McCombs School of Business
Austin, TX 78712
United States
512-471-6621 (Phone)

HOME PAGE: http://www.jgriffin.info

Zhiwu Chen

University of Hong Kong ( email )

Pokfulam Road
Hong Kong
China

Yale University - International Center for Finance ( email )

Box 208200
New Haven, CT 06520-8200
United States
203-432-5948 (Phone)
203-432-6970 (Fax)

Zebra Capital Management, LLC ( email )

612 Wheelers Farms Road
Milford, CT 06461
United States

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