Critical Finance Review > Vol 9 > Issue 1-2

Are Corporate Spin-offs Prone to Insider Trading?

Patrick Augustin, McGill University and CDI, Canada, patrick.augustin@mcgill.ca Menachem Brenner, New York University, USA, mbrenner@stern.nyu.edu Jianfeng Hu, Singapore Management University, Singapore, jianfenghu@smu.edu.sg Marti G. Subrahmanyam, New York University and NYU Shanghai, USA, msubrahm@stern.nyu.edu
 
Suggested Citation
Patrick Augustin, Menachem Brenner, Jianfeng Hu and Marti G. Subrahmanyam (2020), "Are Corporate Spin-offs Prone to Insider Trading?", Critical Finance Review: Vol. 9: No. 1-2, pp 115-155. http://dx.doi.org/10.1561/104.00000084

Publication Date: 11 Jun 2020
© 2020 P. Augustin, M. Brenner, J. Hu, and M. G. Subrahmanyam
 
Subjects
 
Keywords
D82G14G34K22K41
Capital structureDerivativesOptionsSEC
 

Share

Download article
In this article:
1. Literature Review and Contributions 
2. Data and Spinoff Announcement Returns: Evidence Revisited 
3. Informed Trading before Corporate Divestitures 
4. Evidence of Pre-Announcement Informed Trading 
5. Conclusion 
Appendix A. Proof for Statistical Inference of Treatment Effects 
References 

Abstract

Despite abundant empirical evidence of informed trading ahead of major corporate events, no such evidence has been reported in the case of corporate spinoff (SP) announcements. This is surprising, as SP announcements are unexpected, and are also associated with a positive price jump in the parent company’s stock. Using a sample of 280 US announcement events from 1996 to 2013, we document significant pre-announcement informed trading activity in options for about 9 to 16% of events in our sample. In contrast, we find statistically insignificant evidence of informed trading in stocks, suggesting that informed traders employ leverage through options. In light of the mixed evidence about the effect of SP announcements on a parent firm’s credit risk and its debt, we also test for the existence of pre-announcement informed trading activity in bonds and credit default swaps, but find no support for such a conclusion.

DOI:10.1561/104.00000084