Are Corporate Spin-Offs Prone to Insider Trading?

Abstract

Recent research has documented empirical evidence of informed trading ahead of major corporate events such as earnings announcements, mergers and acquisitions (M&A) and corporate bankruptcies. Surprisingly, however, no such evidence exists ahead of corporate divestiture or spinoff (SP) announcements. This is noteworthy because the parent company's stock usually experiences a price jump at the time of the deal announcement, similar to the M&A target, which suggests that there exist economic gains from trading on private information. We first present evidence of average abnormal stock announcement returns of approximately 2%, with greater abnormal returns for cross-industry spinoffs, deals that reflect a greater fraction of a parent's market capitalization, and if the subsidiary is incorporated in the same state. We then investigate informed trading activity in stocks and equity options prior to the announcement of corporate SPs for a sample of 426 US parents over the time period January 1996 to December 2013. For the parent companies, we document pervasive directional activity in options, but not in stocks, consistent with strategies that could yield very high abnormal returns to investors with private information. This is evidenced by positive abnormal trading volumes and excess implied volatility for options prior to SP announcements. However, strikingly, there is no evidence of abnormal volumes or returns for stocks. The effects are stronger for call options than for put options, in particular for out-of-the-money (OTM) and at-the-money (ATM) options. High frequency data confirms the presence of unusual net buying activity in the options market, but not the stock market. We also find that abnormal options volume is the only measure of informed trading that positively and robustly predicts abnormal announcement returns. We also examine informed trading in the fixed income market using bond and CDS data, but find no such evidence. All our results are robust to a propensity-matched control sample based on the probability of being divested.

The Sarbanes‐Oxley act and informed trading in the options market: Evidence from share repurchase announcements

“…Prior studies find informed option trading may occur around several corporate announcements, such as earnings, M&As, SEOs, stock splits, and spin‐offs (Augustin, Brenner, Hu, & Subrahmanyam, 2015; Cao, Chen, & Griffin, 2005; Gharghori et al, 2017; Hao, 2016; Jayaraman, Frye, & Sabherwal, 2001; Jin et al, 2012, among others). To ensure that our results are not affected by informed option trading from these events, as a robustness check, we exclude from our final sample any share repurchase announcements that occur within 15 days before and after these potentially confounding announcements.…”

Passive insider trading before pension freezes

“…Correspondingly, academic research has continued to identify insider trading behaviors around major corporate events. For example, researchers document significant sales by the insiders of firms filing bankruptcy petitions before the filing date (Seyhun & Bradley, 1997), insider trading on private information about specific and economically significant upcoming earnings announcements (Ke et al, 2003; Reeb et al, 2014), and pervasive informed activities in the options of the parent company (Augustin et al, 2020).…”

Options trading prior to takeover rumors

“…We follow the literature (e.g. Wang, 2013;Augustin et al, 2014) are ITM if the strike price is less than 95% of the underlying stock price, ATM if the strike price falls between 95 and 105% of the stock price, and OTM if the strike price is greater than 105% of the stock price [3]. We conduct an event study for each category to compute abnormal volumes and present the results in Table 2, with a graphical representation provided in Figure 2.…”