Are Corporate Spin-offs Prone to Insider Trading?∗ Preliminary Draft

Recent research has documented empirical evidence of informed trading ahead of major corporate events such as earnings announcements, mergers and acquisitions (M&A) and corporate bankruptcies. Surprisingly, however, no such evidence exists ahead of corporate divestiture or spinoff (SP) announcements. This is noteworthy because the parent company’s stock usually experiences a significant price jump at the time of the deal announcement, similar to the M&A target. We first present evidence of average abnormal stock announcement returns of approximately 2%, with greater abnormal returns for cross-industry spinoffs, deals that reflect a greater fraction of a parent’s market capitalization, and if the subsidiary is incorporated in the same state. We then investigate informed trading activity in stocks and equity options prior to the announcement of corporate SPs for a sample of 547 US parents over the time period January 1996 to December 2013. For the parent companies, we document pervasive directional activity in options, but not in stocks, consistent with strategies that could yield very high abnormal returns to investors with private information. This is evidenced by positive abnormal trading volumes and excess implied volatility for options prior to SP announcements. However, strikingly, there is no evidence of abnormal volumes or returns for stocks. The effects are stronger for call options than for put options, in particular for out-of-the-money (OTM) and at-the-money (ATM) options. All our results are robust to a propensity-matched control sample based on the probability of being spun off.