Are informed traders sensitive to regulatory environments?

Abstract

This article empirically analyses how investors with private material information decide in which regulatory regime, set by governments in different countries, to trade. We study put-call deviations (which indicate informed trading) for options written solely on U.S.-listed companies and for those with dual listings / headquarter in China. We argue that informed traders actively choose the regulatory regime with the lowest level of regulatory rigorousness in order to exploit private information. We find that the informational content of put-call parity deviations is detectable for companies listed solely in the U.S., but not for Chinese companies. Our evidence suggests that informed traders do not tend to exploit their private information where regulatory rigorousness is high (e.g., a high likelihood of detection and subsequent enforcement). They will instead opt to trade where regulatory rigorousness is low.JEL classification: C10, G14, G15, N25 AbstractThis article empirically analyses how investors with private material information decide in which regulatory regime, set by governments in different countries, to trade. We study put-call deviations (which indicate informed trading) for options written solely on U.S.-listed companies and for those with dual listings / headquarter in China. We argue that informed traders actively choose the regulatory regime with the lowest level of regulatory rigorousness in order to exploit private information. We find that the informational content of put-call parity deviations is detectable for companies listed solely in the U.S., but not for Chinese companies. Our evidence suggests that informed traders do not tend to exploit their private information where regulatory rigorousness is high (e.g., a high likelihood of detection and subsequent enforcement). They will instead opt to trade where regulatory rigorousness is low.JEL classification: C10, G14, G15, N25

Options availability effect on informed trading in M&As

“…Thus, if the companies opt for M&As during the crisis period, it affects the risk level of the company. Regarding the regulatory impact, researchers like Ordu and Schweizer (2015), Healy and Palepu (2001) and Atanasov et al (2006) explained that regulatory reforms bring down the level of informed trading. Learning from already happened real examples, the authorities improve the existing leakages in the current system that have been causing the insider trading.…”