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Are Corporate Spin-offs Prone to Insider Trading?

Author

Listed:
  • Augustin, Patrick
  • Brenner, Menachem
  • Hu, Jianfeng
  • Subrahmanyam, Marti G.

Abstract

Despite abundant empirical evidence of informed trading ahead of major corporate events, no such evidence has been reported in the case of corporate spinoff (SP) announcements. This is surprising, as SP announcements are unexpected, and are also associated with a positive price jump in the parent company’s stock. Using a sample of 280 US announcement events from 1996 to 2013, we document significant pre-announcement informed trading activity in options for about 9 to 16% of events in our sample. In contrast, we find statistically insignificant evidence of informed trading in stocks, suggesting that informed traders employ leverage through options. In light of the mixed evidence about the effect of SP announcements on a parent firm’s credit risk and its debt, we also test for the existence of pre-announcement informed trading activity in bonds and credit default swaps, but find no support for such a conclusion.

Suggested Citation

  • Augustin, Patrick & Brenner, Menachem & Hu, Jianfeng & Subrahmanyam, Marti G., 2020. "Are Corporate Spin-offs Prone to Insider Trading?," Critical Finance Review, now publishers, vol. 9(1-2), pages 115-155, June.
    • Handle: RePEc:now:jnlcfr:104.00000084
    DOI: 10.1561/104.00000084
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    Cited by:

    1. Augustin, Patrick & Brenner, Menachem & Grass, Gunnar & Orłowski, Piotr & Subrahmanyam, Marti G., 2023. "Informed options strategies before corporate events," Journal of Financial Markets, Elsevier, vol. 63(C).

    More about this item

    Keywords

    Capital structure; Derivatives; Options; SEC;
    All these keywords.

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance
    • K22 - Law and Economics - - Regulation and Business Law - - - Business and Securities Law
    • K41 - Law and Economics - - Legal Procedure, the Legal System, and Illegal Behavior - - - Litigation Process

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