Informed Trading and Price Discovery Before Corporate Events
ARTICLE IN PRESS JID: FINEC [m3Gdc; June 28, 2017;21:7 ] Journal of Financial Economics 0 0 0 (2017) 1–28 Contents lists available at ScienceDirect Journal of Financial Economics journal homepage: www.elsevier.com/locate/jfec Informed trading and price discovery before corporate ✩ events ∗ Shmuel Baruch a, Marios Panayides b, Kumar Venkataraman c, a David Eccles School of Business, University of Utah, Salt Lake City, UT 84112, USA b Katz Graduate School of Business, University of Pittsburgh, Pittsburgh, PA 15260, USA c Edwin L. Cox School of Business, Southern Methodist University, Dallas, TX 75275, USA a r t i c l e i n f o a b s t r a c t Article history: Stock prices incorporate less news before negative events than positive events. Further, Received 5 March 2015 informed agents use less price aggressive (limit) orders before negative events and more Revised 8 June 2016 price aggressive (market) orders before positive events (buy–sell asymmetry). Motivated Accepted 29 June 2016 by these patterns, we model the execution risk that informed agents impose on each other Available online xxx and relate the asymmetry to costly short selling. When investor base is narrow, security JEL classifications: borrowing is difficult, or the magnitude of the event is small, buy–sell asymmetry is pro- G11 nounced and price discovery before negative events is lower. Overall, we show that the G12 strategies of informed traders influence the process of price formation in financial mar- G14 kets, as predicted by theory. G18 ©2017 Elsevier B.V. All rights reserved. Keywords: Informed trader Insider trading Limit order Short selling Buy–sell asymmetry 1.
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