Informed Trading and Price Discovery before Corporate Events
Publication Date
7-3-2013
Abstract
Stock prices incorporate less “news” before negative events than positive events. Further, we find evidence that informed agents use less price aggressive (limit) orders before negative events and more price aggressive (market) orders before positive events ("buy-sell asymmetry"). Motivated by these patterns, we model the execution risk that informed agents impose on each other and relate the asymmetry to costly short selling. When investor base is narrow, security borrowing is difficult, or the magnitude of the event is small, buy-sell asymmetry is pronounced and price discovery before negative events is lower. Overall, informed agents' strategies influence the process of price formation in financial markets, as predicted by theory.
Document Type
Article
Keywords
Informed trader; insider trading; trading strategy; short sale; buy-sell asymmetry
Disciplines
Finance
DOI
10.2139/ssrn.2288914
Source
SMU Cox: Finance (Topic)
Language
English
