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Do Social Networks Facilitate Informed Option Trading? Evidence from Alumni Reunion Networks

Published online by Cambridge University Press:  15 November 2021

Harvey Cheong ,
Joon Ho Kim ,
Florian Münkel  and
Harold D. Spilker III Open the ORCID record for Harold D. Spilker III [Opens in a new window]
Harvey Cheong
Affiliation:
Singapore Energy Market Authority [email protected]
Joon Ho Kim
Affiliation:
University of Hawai‘i at Mānoa Shidler College of Business [email protected]
Florian Münkel
Affiliation:
Saint Mary’s University Sobey School of Business [email protected]
Harold D. Spilker III*
Affiliation:
University of Hawai‘i at Mānoa Shidler College of Business
*
[email protected] (corresponding author)
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Abstract

Material private information transmits through social networks. Using manually collected information on networks of alumni reunion cohorts, we show that hedge fund managers connected to directors of firms engaged in merger deals increase call-option holdings on target firms before deal announcements. Effects are larger when reunion events for connected cohorts occur just before announcements. Independent directors, directors with short tenure, and directors with low stock ownership are more likely to transmit information. Our results are robust to confounding factors and alternative specifications. These findings highlight the role of social networks as channels of private-information dissemination.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 57 , Issue 6 , September 2022 , pp. 2095 - 2139
Copyright
© The Author(s), 2021. Published by Cambridge University Press on behalf of the Michael G. Foster School of Business, University of Washington

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Footnotes

We thank Kenneth Ahern, Ran Duchin, Jarrad Harford, Edward Rice, Stephan Siegel, and Russell Wermers, as well as seminar participants at Saint Mary’s University, the University of Hawai‘i at Mānoa, and the University of Washington for useful comments. A substantial portion of the data work for this article was conducted while Joon Ho Kim and Harvey Cheong were a visiting scholar and a PhD student, respectively, at the Foster School of Business at the University of Washington. We especially thank Jennifer Conrad (the editor) and Marco Rossi (the referee) for helpful comments that greatly improved the article.

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