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Informational Content of Options Trading on Acquirer Announcement Return

Published online by Cambridge University Press:  23 December 2015

Konan Chan ,
Li Ge  and
Tse-Chun Lin
Konan Chan
Affiliation:
konan@nccu.edu.tw, Department of Finance, National Chengchi University, Taipei, Taiwan
Li Ge
Affiliation:
li.ge@monash.edu, Monash Business School, Monash University, Melbourne, Victoria, Australia
Tse-Chun Lin*
Affiliation:
tsechunlin@hku.hk, University of Hong Kong, Pok Fu Lam, Hong Kong.
*
*Corresponding author: tsechunlin@hku.hk
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Abstract

This study examines the informational content of options trading on acquirer announcement returns. We show that implied volatility spread predicts positively on the cumulative abnormal return (CAR), and implied volatility skew predicts negatively on the CAR. The predictability is much stronger around actual merger and acquisition (M&A) announcement days, as compared with pseudo-event days. The prediction is weaker if pre-M&A stock price has incorporated part of the information, but stronger if the acquirer’s options trading is more liquid. Finally, we find that a higher relative trading volume of options to stock predicts higher absolute CARs. The relation also exists among the target firms.

Type
Research Articles
Information
Journal of Financial and Quantitative Analysis , Volume 50 , Issue 5 , October 2015 , pp. 1057 - 1082
Copyright
Copyright © Michael G. Foster School of Business, University of Washington 2015 

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