Options availability effect on informed trading in M&As

Abstract

Purpose

Informed trading has a strong liaison with the options market, as the risk in the options market is limited to the premium, leverage is high and the transaction cost is less. The purpose of this paper is to analyze the effect of options availability on the informed trading, occurring well before the merger and acquisition (M&A) announcements along with the crisis period and regulation effect.

Design/methodology/approach

The study employs event study methodology for 864 M&A announcements done by Indian acquiring companies in order to compute the abnormal returns and also examine the implied volatility and volume of call, putting options for the robustness check.

Findings

The results indicate that option listing status increases the possibility and magnitude of informed trading in the M&As, which gets more/less pronounced during and immediately after the crisis period when new regulatory reforms are introduced.

Originality/value

This study contributes to the efficient market theory and affirms that stock market of acquiring companies in India follow a semi-strong form of market efficiency around M&A announcements in the presence of options market.

Citation

Mohil, S., Patro, A. and Nayyar, R. (2019), "Options availability effect on informed trading in M&As", Managerial Finance, Vol. 45 No. 10/11, pp. 1382-1397. https://doi.org/10.1108/MF-07-2018-0326