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Do Prices Reveal the Presence of Informed Trading?

Author

Listed:
  • Pierre Collin-Dufresne

    (Ecole Polytechnique Fédérale de Lausanne; Swiss Finance Institute; National Bureau of Economic Research (NBER))

  • Vyacheslav Fos

    (Boston College - Department of Finance; European Corporate Governance Institute (ECGI); Centre for Economic Policy Research (CEPR))

Abstract

Using a comprehensive sample of trades from Schedule 13D filings by activist investors, we study how measures of adverse selection respond to informed trading. We find that on days when activists accumulate shares, measures of adverse selection and of stock illiquidity are lower, even though prices are positively impacted. Two channels help explain this phenomenon: (a) activists select times of higher liquidity when they trade, and (b) activists use limit orders. We conclude that when informed traders can select when and how to trade, standard measures of adverse selection may fail to capture the presence of informed trading.

Suggested Citation

  • Pierre Collin-Dufresne & Vyacheslav Fos, 2013. "Do Prices Reveal the Presence of Informed Trading?," Swiss Finance Institute Research Paper Series 13-69, Swiss Finance Institute, revised Sep 2015.
    • Handle: RePEc:chf:rpseri:rp1369
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    More about this item

    Keywords

    informed trading; liquidity; transaction costs; selection bias; activist shareholders;
    All these keywords.

    JEL classification:

    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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