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How does divergence of opinions affect the relative trading activity and information content in option and stock prior to takeover announcement?

Author

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  • Huang, H.C.
  • Tung, P.S.

Abstract

This paper examines whether the options/stock trading volume ratio (O/S) is higher when investors’ opinions are more diverse with respect to the value of acquirer during pre-takeover announcement period and explores how divergence of opinions affects the predictive power of O/S on subsequent stock prices. We find that the coefficients of proxies for diversity of opinion are significantly positive, suggesting that more disagreements tend to have higher volumes of option trading relative to stock. Less predictive powers of O/S on subsequent stock returns are associated with larger divergence of opinion, implying that O/S contains less information about subsequent stock price movements when the divergence of opinions of acquirer firm is higher.

Suggested Citation

  • Huang, H.C. & Tung, P.S., 2016. "How does divergence of opinions affect the relative trading activity and information content in option and stock prior to takeover announcement?," The Quarterly Review of Economics and Finance, Elsevier, vol. 60(C), pages 162-171.
    • Handle: RePEc:eee:quaeco:v:60:y:2016:i:c:p:162-171
    DOI: 10.1016/j.qref.2015.10.007
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    Cited by:

    1. Patrick Augustin & Menachem Brenner & Marti G. Subrahmanyam, 2019. "Informed Options Trading Prior to Takeover Announcements: Insider Trading?," Management Science, INFORMS, vol. 65(12), pages 5697-5720, December.

    More about this item

    Keywords

    Options/stock trading volume ratio (O/S); Divergence of opinions; Takeover;
    All these keywords.

    JEL classification:

    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance

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