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 spino (SP) announcements. This is noteworthy because the parent company’s stock usually experiences a price jump at the time of the deal announcement, as does the M&A target’s stock, which suggests that there exist economic gains from trading on private information. Using a sample of 426 corporate SPs in the US over the time period January 1996 to December 2013, we rst present evidence of average abnormal stock announcement returns for the parent companies of approximately 2%, with greater abnormal returns for cross-industry SPs, deals that reect a greater fraction of a parent’s market capitalization, and those where 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 subsample of 280 events. 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. The eects 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 conrm the presence of unusual net buying activity in the options market, but not the stock market. We also nd that abnormal options volume is the only measure of informed trading that positively and robustly predicts abnormal announcement returns. Positive abnormal stock announcement returns are associated with negative abnormal bond announcement returns, plausibly due to a wealth transfer from bondholders to shareholders. Thus, we further examine informed trading in the xed income market