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) |
|---|---|
| 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 |
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Keywords
- Institutional investors
- Local investors
- Option backdating
- Scandal
- Trading
ASJC Scopus subject areas
- Business and International Management
- Finance
- Economics and Econometrics
- Strategy and Management
Cite this
Institutional trading during a wave of corporate scandals : "Perfect Payday"? / Bernile, Gennaro; Sulaeman, Johan; Wang, Qin.
In: Journal of Corporate Finance, Vol. 34, 01.10.2015, p. 191-209.Research output: Contribution to journal › Article
}
TY - JOUR
T1 - Institutional trading during a wave of corporate scandals
T2 - "Perfect Payday"?
AU - Bernile, Gennaro
AU - Sulaeman, Johan
AU - Wang, Qin
PY - 2015/10/1
Y1 - 2015/10/1
N2 - 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.
AB - 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.
KW - Institutional investors
KW - Local investors
KW - Option backdating
KW - Scandal
KW - Trading
UR - http://www.scopus.com/inward/record.url?scp=84949085078&partnerID=8YFLogxK
UR - http://www.scopus.com/inward/citedby.url?scp=84949085078&partnerID=8YFLogxK
U2 - 10.1016/j.jcorpfin.2015.07.004
DO - 10.1016/j.jcorpfin.2015.07.004
M3 - Article
AN - SCOPUS:84949085078
VL - 34
SP - 191
EP - 209
JO - Journal of Corporate Finance
JF - Journal of Corporate Finance
SN - 0929-1199
ER -