Institutional Trading during a Wave of Corporate Scandals: 'Perfect Payday'?

Gennaro BERNILE, Singapore Management University
Johan Sulaeman, Southern Methodist University
Qin Wang, University of Michigan - Dearborn


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 and manifest earlier ahead of firm-specific exposures as the scope of the scandal broadens. 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, institutions, particularly local ones, behave as informed investors during this prolonged period of heightened uncertainty about corporate reporting and governance practices.