Abstract
This paper examines the role of institutional trading during the option backdating scandal of 2006-2007. Unlike their inability to anticipate other corporate events, institutional investors as a group display negative abnormal trading imbalances (i.e., buy minus sell volumes) in anticipation of firm-specific backdating exposures. Consistent with informed trading, the underlying trades earn positive abnormal short- and long-term profits. Moreover, the negative abnormal imbalances are larger in magnitude when backdating is likely a more severe issue. Local institutions, in particular, display negative trading imbalances earlier in event-time and earn consistently higher trading profits than non-local institutions. Although we find some evidence of over-reaction following the arrival of information about the backdating scandal, these patterns are short-lived and exclusively due to the activity of non-local institutions. Overall, institutional investors behave as informed investors, particularly in local stocks, during this prolonged period of heightened uncertainty about corporate reporting and governance practices.
Original language | English (US) |
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Pages (from-to) | 191-209 |
Number of pages | 19 |
Journal | Journal of Corporate Finance |
Volume | 34 |
DOIs | |
State | Published - Oct 1 2015 |
Externally published | Yes |
Keywords
- Institutional investors
- Local investors
- Option backdating
- Scandal
- Trading
ASJC Scopus subject areas
- Business and International Management
- Finance
- Economics and Econometrics
- Strategy and Management