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Informed Options Trading Prior to Dividend Change Announcements
Author(s) -
Zhang Jun
Publication year - 2017
Publication title -
financial management
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.647
H-Index - 68
eISSN - 1755-053X
pISSN - 0046-3892
DOI - 10.1111/fima.12187
Subject(s) - predictability , dividend , dividend yield , financial economics , stock market , trading strategy , volatility (finance) , business , predictive power , economics , monetary economics , econometrics , dividend policy , finance , paleontology , philosophy , physics , horse , quantum mechanics , epistemology , biology
This paper investigates the information content of options trading prior to dividend change announcements. I find a positive (negative) relation between pre‐announcement abnormal implied volatility (IV) spread (abnormal IV skew) and cumulative abnormal stock returns around dividend change announcements. The predictive power of informed options trading is stronger for announcements of dividend reduction and when the options market is more liquid relative to the stock market and weaker when information has already been incorporated in the stock market. The predictability of informed options trading is robust to a placebo test and alternative measures of informed options trading. Overall results suggest that informed options trading predicts dividend change announcement returns.