Abstract

https://ssrn.com/abstract=445320
 
 

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Informational Content of Option Volume Prior to Takeovers


Charles Cao


Pennsylvania State University

John M. Griffin


University of Texas at Austin - Department of Finance

Zhiwu Chen


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

September 2003

Yale SOM Working Paper No. ES-31

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.

Number of Pages in PDF File: 58


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Date posted: October 27, 2003  

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

Contact Information

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
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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