Publication Type

Journal Article

Version

submittedVersion

Publication Date

10-2015

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.

Keywords

Institutional investors, Local investors, Option backdating, Scandal, Trading

Discipline

Business | Corporate Finance | Portfolio and Security Analysis

Research Areas

Finance

Publication

Journal of Corporate Finance

Volume

34

First Page

191

Last Page

209

ISSN

0929-1199

Identifier

10.1016/j.jcorpfin.2015.07.004

Publisher

Elsevier

Copyright Owner and License

Authors

Additional URL

https://doi.org/10.1016/j.jcorpfin.2015.07.004

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