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Insider Trading and Option Grant Timing in Response to Fire Sales (and Purchases) of Stocks by Mutual Funds
Author(s) -
ALI ASHIQ,
WEI KELSEY D.,
ZHOU YIBIN
Publication year - 2011
Publication title -
journal of accounting research
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 6.767
H-Index - 141
eISSN - 1475-679X
pISSN - 0021-8456
DOI - 10.1111/j.1475-679x.2011.00406.x
Subject(s) - mutual fund , business , insider trading , stock (firearms) , stock price , exploit , insider , finance , monetary economics , economics , computer science , mechanical engineering , paleontology , computer security , series (stratigraphy) , law , political science , engineering , biology
Mutual funds experiencing large outflows (inflows) tend to decrease (expand) their positions, creating downward (upward) price pressure in the stocks held in common by them (Coval and Stafford [2007]). This study shows that corporate insiders exploit the resulting mispricing by buying (selling) their company's stock if it is subject to such fire sales (purchases) by funds. We also show that the likelihood of option grants is greater for stocks that are subject to mutual fund fire sales. Finally, we show that both the insider trading and the option granting activities help speed up the correction of the flow‐driven mispricing. Overall, this study illustrates that insiders enhance personal benefits by trading on their personal account and influencing the timing of option grants in response to mispricing due to flow‐driven fund trading. Moreover, these activities help improve the informational efficiency of stock price.