Critical Finance Review > Vol 9 > Issue 1-2

Are Corporate Spin-offs Prone to Insider Trading?

Patrick Augustin, McGill University and CDI, Canada, Menachem Brenner, New York University, USA, Jianfeng Hu, Singapore Management University, Singapore, Marti G. Subrahmanyam, New York University and NYU Shanghai, USA,
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.

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


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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


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.