Hostname: page-component-78c5997874-xbtfd Total loading time: 0 Render date: 2024-11-15T18:38:50.235Z Has data issue: false hasContentIssue false
  • English
  • Français

Do Social Networks Facilitate Informed Option Trading? Evidence from Alumni Reunion Networks

Published online by Cambridge University Press:  15 November 2021

Harvey Cheong ,
Joon Ho Kim ,
Florian Münkel  and
Harold D. Spilker III Open the ORCID record for Harold D. Spilker III [Opens in a new window]
Harvey Cheong
Affiliation:
Singapore Energy Market Authority harvey_cheong@ema.gov.sg
Joon Ho Kim
Affiliation:
University of Hawai‘i at Mānoa Shidler College of Business joonhok@hawaii.edu
Florian Münkel
Affiliation:
Saint Mary’s University Sobey School of Business florian.muenkel@smu.ca
Harold D. Spilker III*
Affiliation:
University of Hawai‘i at Mānoa Shidler College of Business
*
tray.spilker@hawaii.edu (corresponding author)
Get access Rights & Permissions [Opens in a new window]

Abstract

Material private information transmits through social networks. Using manually collected information on networks of alumni reunion cohorts, we show that hedge fund managers connected to directors of firms engaged in merger deals increase call-option holdings on target firms before deal announcements. Effects are larger when reunion events for connected cohorts occur just before announcements. Independent directors, directors with short tenure, and directors with low stock ownership are more likely to transmit information. Our results are robust to confounding factors and alternative specifications. These findings highlight the role of social networks as channels of private-information dissemination.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 57 , Issue 6 , September 2022 , pp. 2095 - 2139
Copyright
© The Author(s), 2021. Published by Cambridge University Press on behalf of the Michael G. Foster School of Business, University of Washington

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

Footnotes

We thank Kenneth Ahern, Ran Duchin, Jarrad Harford, Edward Rice, Stephan Siegel, and Russell Wermers, as well as seminar participants at Saint Mary’s University, the University of Hawai‘i at Mānoa, and the University of Washington for useful comments. A substantial portion of the data work for this article was conducted while Joon Ho Kim and Harvey Cheong were a visiting scholar and a PhD student, respectively, at the Foster School of Business at the University of Washington. We especially thank Jennifer Conrad (the editor) and Marco Rossi (the referee) for helpful comments that greatly improved the article.

References

Agarwal, N. C. “Determinants of Executive Compensation.” Industrial Relations: A Journal of Economy and Society, 20 (1981), 36–45.Google Scholar
Agrawal, A., and Jaffe, J. F.. "Does Section 16b Deter Insider Trading by Target Managers?" Journal of Financial Economics, 39 (1995), 295–319.CrossRefGoogle Scholar
Augustin, P.; Brenner, M.; and Subrahmanyam, M. G.. “Informed Options Trading Prior to Takeover Announcements: Insider Trading?” Management Science, 65 (2019), 5697–5720.CrossRefGoogle Scholar
Ausubel, L. M. “Insider Trading in a Rational Expectations Economy.” American Economic Review, 80 (1990), 1022–1041.Google Scholar
Back, K. “Asymmetric Information and Options.” Review of Financial Studies, 6 (1993), 435–472.Google Scholar
Barro, J. R., and Barro, R. J.. “Pay, Performance, and Turnover of Bank CEOs.” Journal of Labor Economics, 8 (1990), 448–481.CrossRefGoogle Scholar
Bettis, J. C.; Coles, J. L.; and Lemmon, M. L.. “Corporate Policies Restricting Trading by Insiders.” Journal of Financial Economics, 57 (2000), 191–220.CrossRefGoogle Scholar
Betton, S.; Eckbo, B. E.; Thompson, R.; and Thorburn, K. S.. “Merger Negotiations with Stock Market Feedback.” Journal of Finance, 69 (2014), 1705–1745.CrossRefGoogle Scholar
Bhattacharya, U. “Insider Trading Controversies: A Literature Review.” Annual Review Financial Economics, 61 (2014), 385–403.CrossRefGoogle Scholar
Black, F. “Fact and Fantasy in the Use of Options.” Financial Analysts Journal, 31 (1975), 36–41.CrossRefGoogle Scholar
Bliss, R. T., and Rosen, R. J.. “CEO Compensation and Bank Mergers.” Journal of Financial Economics, 61 (2001), 107–138.CrossRefGoogle Scholar
Bodnaruk, A.; Massa, M.; and Simonov, A.. “Investment Banks as Insiders and the Market for Corporate Control.” Review of Financial Studies, 22 (2009), 4989–5026.Google Scholar
Brav, A.; Jiang, W.; Partnoy, F.; and Thomas, R.. “Hedge Fund Activism, Corporate Governance, and Firm Performance.” Journal of Finance, 63 (2008), 1729–1775.CrossRefGoogle Scholar
Brown, S. J., and Warner, J. B.. “Using Daily Stock Returns: The Case of Event Studies.” Journal of Financial Economics, 14 (1985), 3–31.CrossRefGoogle Scholar
Brunnermeier, M. K., and Nagel, S.. “Hedge Funds and the Technology Bubble.” Journal of Finance, 59 (2004), 2013–2040.CrossRefGoogle Scholar
Cao, C. “The Effect of Derivative Assets on Information Acquisition and Price Behavior in a Rational Expectations Equilibrium.” Review of Financial Studies, 12 (1999), 131–163.CrossRefGoogle Scholar
Cao, C.; Chen, Z.; and Griffin, J. M.. “Informational Content of Option Volume Prior to Takeovers.” Journal of Business, 78 (2005), 1073–1109.Google Scholar
Chakravarty, S.; Gulen, H.; and Mayhew, S.. “Informed Trading in Stock and Option Markets.” Journal of Finance, 59 (2004), 1235–1257.CrossRefGoogle Scholar
Chan, K.; Ge, L.; and Lin, T. C.. “Informational Content of Options Trading on Acquirer Announcement Return.” Journal of Financial and Quantitative Analysis, 50 (2015), 1057–1082.CrossRefGoogle Scholar
Cheng, Q., and Lo, K.. “Insider Trading and Voluntary Disclosures.” Journal of Accounting Research, 44 (2006), 815–848.CrossRefGoogle Scholar
Chevalier, J., and Ellison, G.. “Are Some Mutual Fund Managers Better Than Others? Cross‐Sectional Patterns in Behavior and Performance.” Journal of Finance, 54 (1999), 875–899.CrossRefGoogle Scholar
Ciscel, D. H., and Carroll, T. M.. “The Determinants of Executive Salaries: An Econometric Survey.” Review of Economics and Statistics, 62 (1980), 7–13.CrossRefGoogle Scholar
Cohen, L.; Frazzini, A.; and Malloy, C.. “The Small World of Investing: Board Connections and Mutual Fund Returns.” Journal of Political Economy, 116 (2008), 951–979.CrossRefGoogle Scholar
Cohen, L.; Malloy, C.; and Pomorski, L.. “Decoding Inside Information.” Journal of Finance, 67 (2012), 1009–1043.CrossRefGoogle Scholar
Cosh, A. “The Remuneration of Chief Executives in the United Kingdom.” Economic Journal, 85 (1975), 75–94.Google Scholar
Dent, G. W. Jr. “Why Legalized Insider Trading Would Be a Disaster.” Delaware Journal of Corporate Law, 38 (2013), 247.Google Scholar
Easley, D.; O’Hara, M.; and Srinivas, P. S.. “Option Volume and Stock Prices: Evidence on Where Informed Traders Trade.” Journal of Finance, 53 (1998), 431–465.CrossRefGoogle Scholar
Fuller, K.; Netter, J.; and Stegemoller, M.. “What Do Returns to Acquiring Firms Tell Us? Evidence from Firms That Make Many Acquisitions.” Journal of Finance, 57 (2002), 1763–1793.CrossRefGoogle Scholar
Griffin, J. M., and Xu, J.. “How Smart Are the Smart Guys? A Unique View from Hedge Fund Stock Holdings.” Review of Financial Studies, 22 (2009), 2531–2570.CrossRefGoogle Scholar
Harford, J. “Takeover Bids and Target Directors’ Incentives: The Impact of a Bid on Directors’ Wealth and Board Seats.” Journal of Financial Economics, 69 (2003), 51–83.CrossRefGoogle Scholar
Harford, J.; Jenter, D.; and Li, K.. “Institutional Cross-Holdings and Their Effect on Acquisition Decisions.” Journal of Financial Economics, 99 (2011), 27–39.CrossRefGoogle Scholar
Hong, H.; Kubik, J. D.; and Stein, J. C.. “Thy Neighbor’s Portfolio: Word‐of‐Mouth Effects in the Holdings and Trades of Money Managers.” Journal of Finance, 60 (2005), 2801–2824.CrossRefGoogle Scholar
Huberman, G. “Familiarity Breeds Investment.” Review of Financial Studies, 14 (2001), 659–680.Google Scholar
Ivashina, V., and Sun, Z.. “Institutional Stock Trading on Loan Market Information.” Journal of Financial Economics, 100 (2011), 284–303.CrossRefGoogle Scholar
John, K.; Koticha, A.; Subrahmanyam, M. G.; and Narayanan, R.. “Margin Rules, Informed Trading in Derivatives, and Price Dynamics.” Working Paper, available at https://ssrn.com/abstract=424981 (2003).CrossRefGoogle Scholar
Johnson, T. L., and So, E. C.. “The Option to Stock Volume Ratio and Future Returns.” Journal of Financial Economics, 106 (2012), 262–286.CrossRefGoogle Scholar
Kalmijn, M., and Flap, H.. “Assortative Meeting and Mating: Unintended Consequences of Organized Settings for Partner Choices.” Social Forces, 79 (2001), 1289–1312.CrossRefGoogle Scholar
Kostiuk, P. F. “Firm Size and Executive Compensation.” Journal of Human Resources, 25 (1989), 91–105.Google Scholar
Kumar, N.; Mullally, K.; Ray, S.; and Tang, Y.. “Prime (Information) Brokerage.” Journal of Financial Economics, 137 (2020), 371–391.CrossRefGoogle Scholar
Lakonishok, J., and Lee, I.. “Are Insider Trades Informative?” Review of Financial Studies, 14 (2001), 79–111.CrossRefGoogle Scholar
Lowry, M.; Rossi, M.; and Zhu, Z.. “Informed Trading by Advisor Banks: Evidence from Options Holdings.” Review of Financial Studies, 32 (2019), 605–645.CrossRefGoogle Scholar
Marin, J. M., and Olivier, J. P.. “The Dog That Did Not Bark: Insider Trading and Crashes.” Journal of Finance, 63 (2008), 2429–2476.CrossRefGoogle Scholar
Massoud, N.; Nandy, D.; Saunders, A.; and Song, K.. “Do Hedge Funds Trade on Private Information? Evidence from Syndicated Lending and Short-Selling.” Journal of Financial Economics, 99 (2011), 477–499.CrossRefGoogle Scholar
Moeller, S. B.; Schlingemann, F. P.; and Stulz, R. M.. “Firm Size and the Gains from Acquisitions.” Journal of Financial Economics, 73(2004), 201–228.Google Scholar
Murphy, K. J. “Corporate Performance and Managerial Remuneration: An Empirical Analysis.” Journal of Accounting and Economics, 7 (1985), 11–42.Google Scholar
Ravina, E., and Sapienza, P.. “What Do Independent Directors Know? Evidence from Their Trading.” Review of Financial Studies, 23 (2010), 962–1003.CrossRefGoogle Scholar
Roulstone, D. T. “The Relation between Insider‐Trading Restrictions and Executive Compensation.” Journal of Accounting Research, 41 (2003), 525–551.CrossRefGoogle Scholar
Schwert, G. W. “Markup Pricing in Mergers and Acquisitions.” Journal of Financial Economics, 41 (1996), 153–192.Google Scholar
Shue, K. “Executive Networks and Firm Policies: Evidence from the Random Assignment of MBA Peers.” Review of Financial Studies, 26 (2013), 1401–1442.CrossRefGoogle Scholar
Weinbaum, D.; Fodor, A.; Muravyev, D.; and Cremers, M.. “How Do Informed Option Traders Trade? Option Trading Activity, News Releases, and Stock Return Predictability.” In the 11th Annual Mid-Atlantic Research Conference in Finance (MARC) 28th annual Conference on Financial Economics and Accounting (2020).Google Scholar
Yermack, D. “Remuneration, Retention, and Reputation Incentives for Outside Directors.” Journal of Finance, 59 (2004), 2281–2308.Google Scholar
Yonker, S. E. “Geography and the Market for CEOs.” Management Science, 63 (2017), 609–630.Google Scholar
Supplementary material: PDF

Cheong et al. supplementary material

Cheong et al. supplementary material

Download Cheong et al. supplementary material(PDF)
PDF 502.3 KB