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Informed trading prior to financial misconduct: Evidence from option markets

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  • Li, Keming

Abstract

This paper shows an abnormal level of option trading activities in the ten days before the revelation of financial misconduct in a sample of the SEC and/or DOJ enforcement actions. These abnormal option trading volumes are negatively associated with the subsequent stock returns to the announcements, and are positively linked to firm penalty, the number of violations, prison sentences, fraud charge, top executives number, potential firm deception toward auditors, impeded investigation, and violation period. Finally, abnormal option trading is related to the time to discovery and the likelihood of discovery. These results suggest that option traders detect firms engaged in financial misconducts.

Suggested Citation

  • Li, Keming, 2024. "Informed trading prior to financial misconduct: Evidence from option markets," Journal of Financial Markets, Elsevier, vol. 67(C).
    • Handle: RePEc:eee:finmar:v:67:y:2024:i:c:s1386418123000538
    DOI: 10.1016/j.finmar.2023.100855
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    References listed on IDEAS

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    Cited by:

    1. Gerken, William & Irlbeck, Steven & Painter, Marcus & Zhang, Guangli, 2024. "Watching the watchdogs: Tracking SEC inquiries using geolocation data," Working Papers 349, The University of Chicago Booth School of Business, George J. Stigler Center for the Study of the Economy and the State.

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    More about this item

    Keywords

    Option volume; Financial misconduct; Informed trading;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G41 - Financial Economics - - Behavioral Finance - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making in Financial Markets

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