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Informed Trading around Merger Announcements: An Empirical Test Using Transaction Volume and Open Interest in Options Market
Author(s) -
Jayaraman Narayanan,
Frye Melissa B.,
Sabherwal Sanjiv
Publication year - 2001
Publication title -
financial review
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.621
H-Index - 47
eISSN - 1540-6288
pISSN - 0732-8516
DOI - 10.1111/j.1540-6288.2001.tb00010.x
Subject(s) - business , algorithmic trading , high frequency trading , alternative trading system , open outcry , equity (law) , financial economics , database transaction , price discovery , event study , empirical evidence , stock market , monetary economics , economics , finance , futures contract , paleontology , philosophy , context (archaeology) , epistemology , horse , political science , computer science , law , biology , programming language
This paper provides empirical evidence on the level of trading activity in the stock options market prior to the announcement of a merger or an acquisition. Our analysis shows that there is a significant increase in the trading activity of call and put options for companies involved in a takeover prior to the rumor of an acquisition or merger. This result is robust to both the volume of option contracts traded and the open interest. The increased trading suggests that there is a significant level of informed trading in the options market prior to the announcement of a corporate event. In addition, abnormal trading activity in the options market appears to lead abnormal trading volume in the equity market. This finding supports the hypothesis that the options market plays an important role in price discovery.