Informed Trading Before Unscheduled Corporate Events: Theory and Evidence

July 24, 2013 Leave a comment

Informed Trading Before Unscheduled Corporate Events: Theory and Evidence

Shmuel Baruch University of Utah – Department of Finance

Marios A. Panayides University of Pittsburgh – Finance Group; University of Utah

Kumar Venkataraman Southern Methodist University (SMU) – Edwin L. Cox School of Business

May 2013

Abstract: 
Despite widespread evidence that informed agents are active before corporate events, there is little work describing how informed agents accumulate positions and what explains their trading strategies. We use the prisoners’ dilemma to model the execution risk that informed traders impose on each other and explain why they forgo the price benefit of limit orders and use instead market orders. However the efficient limit-orders outcome is obtained if there is sufficient uncertainty about the presence of informed traders. We link the level of uncertainty to costly short selling and test theoretical predictions using order level data from Euronext Paris. We find empirical support for the prediction that informed traders use limit orders when the news is negative, especially when (a) the investor base is not broad, (b) security borrowing costs are high, and (c) the magnitude of the event is small so potential profits cannot justify the cost of borrowing. When the news is positive, we show that informed buyers face more competition and use market orders. These results help explain the buy-sell asymmetry in price impact of trades and provide a framework for surveillance systems that are designed to detect insider trading.

Filed under Research

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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