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Firm opacity and informed trading around spinoffs

Yuan Wen (School of Business, SUNY New Paltz, New Paltz, New York, USA)

Journal of Risk Finance

ISSN: 1526-5943

Article publication date: 28 June 2018

Issue publication date: 10 August 2018

529

Abstract

Purpose

This paper aims to examine the prevalence of informed trading around corporate spinoffs and the relation between firm opacity and informed trading using option market data.

Design/methodology/approach

The author investigates the prevalence of informed trading by examining the relationship between abnormal stock returns associated with spinoffs and the volatility spread/volatility skewness of options prior to the spinoffs. Furthermore, the author examines how opacity and organizational complexity prior to the spinoffs affect informed trading.

Findings

The study shows that option volatility spread and volatility skewness for the five days prior to the spinoffs can predict the abnormal stock returns on the spinoff announcement days, suggesting that there is informed trading in the options market prior to spinoffs. The study shows that informed trading is more prevalent for firms that are more opaque prior to the spinoff. Furthermore, informed trading decreases after spinoffs.

Originality/value

To the best of knowledge, this is the first empirical research that examines the prevalence of informed trading around spinoffs by using options volatility spread/skewness and the relation between firm opacity and informed options trading.

Keywords

Acknowledgements

The author thanks the participants at the 2016 Conference on Convergence of Financial and Managerial Accounting in Philadelphia for their helpful comments.

Citation

Wen, Y. (2018), "Firm opacity and informed trading around spinoffs", Journal of Risk Finance, Vol. 19 No. 3, pp. 262-276. https://doi.org/10.1108/JRF-01-2017-0008

Publisher

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Emerald Publishing Limited

Copyright © 2018, Emerald Publishing Limited

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