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Informational Content of Option Volume Prior to Takeovers

Author

Listed:
  • Charles Cao

    (Smeal College of Business, Pennsylvania State University and CCFR)

  • Zhiwu Chen

    (School of Management, Yale University)

  • John M. Griffin

    (McCombs School of Business, University of Texas at Austin)

Abstract

Which market attracts informed investors prior to extreme informational events? We examine the information embedded in the stock and option markets prior to takeover announcements. Normally, buyer-seller initiated stock volume imbalances are predictors of next-day stock returns and option volume is uninformative. However, prior to takeover announcements, call-volume imbalances are strongly related to next-day stock returns. Cross-sectional analysis shows that takeover targets with the largest preannouncement call-imbalance increases experience the highest announcement-day returns. These findings suggest that, with pending extreme informational events, the options market plays an important role in price discovery.

Suggested Citation

  • Charles Cao & Zhiwu Chen & John M. Griffin, 2005. "Informational Content of Option Volume Prior to Takeovers," The Journal of Business, University of Chicago Press, vol. 78(3), pages 1073-1109, May.
  • Handle: RePEc:ucp:jnlbus:v:78:y:2005:i:3:p:1073-1072
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