Purpose – The purpose of this paper is to examine whether the underlying option impacts an insider’s propensity to purchase and sell before corporate announcements, the proportion of insiders’ trading after announcements relative to before announcements, and the insider’s profitability around corporate announcements. Design/methodology/approach – The authors test whether the timing information and option have impacted on the tendency of insider trade, the percentage of all shares traded by insiders in the post-announcement to pre-announcement periods and the average cumulative abnormal stock returns during the pre-announcement period. Findings – Insiders’ propensity to trade before announcements is higher for stocks without options listed than for stocks with traded options. This result is stronger for unscheduled announcements than for scheduled ones. The proportion of insiders’ trade volume after announcements relative to before announcements in stocks that have not options listed is higher than those in stocks with traded options. The positive relationship between the insiders’ signed volume and the informational content of corporate announcements is stronger in stocks without traded options than in stocks with options listed. Insider trades prior to unscheduled announcement are more profitable than those before scheduled ones. Research limitations/implications – The paper examines whether there is a difference between the effects of optioned stock and non-optioned stock. Roll et al. (2010) use the relative trading volume of options to stock ratio (O/S) to proxy for informed options trading activity. Future research could explore the impact of O/S. Moreover, the authors examine how insiders with private information use such information to trade in their own firms. Mehta et al. (2017) argue that insiders also use private information to facilitate trading (shadow trading) in linked firms, such as supply chain partners or competitors. Therefore, future research could consider the impact of shadow trading. Social implications – Since the insider’s propensity to buy before announcements in stocks without options listed is larger than in stocks with traded options and the relationship is stronger for unscheduled announcements than for scheduled ones, the efforts of regulators should focus on monitoring insider trading in stocks without options listed prior to unscheduled announcements. Originality/value – First, Lei and Wang (2014) find that the increasing pattern of insider’s propensity to trade before unscheduled announcements is larger than that before scheduled announcements. The authors document the underlying option has impacted the insider’s propensity to purchase and sell, and the relationship is stronger for unscheduled announcements than for scheduled ones. Second, related studies show insider’s trading activity has shifted from periods before corporate announcements to periods after corporate announcements to decrease litigation risk. This paper find the underlying option has influenced the proportion of insiders’ trading after announcements relative to before announcements when the illegal insider trade-related penalties increase.

Introduction

This paper investigates the difference between insider trading in optioned and non-optioned stocks around scheduled and unscheduled corporate announcements. Extant studies have investigated insider trading around takeover and earning announcements separately. Lei and Wang (2014) exploit the time-varying liquidity trading around announcements to examine how insiders take advantage of time variation to camouflage their trades. They find that the increasing pattern of an insider’s propensity to trade is larger before unscheduled announcements than before scheduled announcements. Related studies about insider trading focus on stock markets rather than option markets. Exceptionally, Hyland et al. (2003) document that the level of insider trading is lower for optioned stocks than for non-optioned stocks. In addition, Ge et al. (2016) find that bankruptcy filing returns are significantly associated with pre-filing insider options trading, whereas filing returns are not significantly related to pre-filing insider stock trading. Therefore, this paper aims to fill a research gap by examining whether the underlying option impacts trading patterns of insider trading before corporate announcements. In addition to information-based trading (Amel-Zadeh et al., 2016), the main reasons that insiders sell their firm stocks are liquidity and diversification. Since insider sales often reflect diversification desires rather than the need to trade on information which insider purchases reflect, it is necessary to examine insider purchases and sales separately. Further, insider sales are more exposed to litigation than purchases because regulators seem to be more attentive to potentially illegal insider trading after stock price drops than after price run-ups (Gao et al., 2015). Insiders might be more careful in using negative information than exploiting positive information (Lee et al., 2014). Thus, it is regarded that insiders respond to positive and negative information asymmetrically. Moreover, Brochet (2010) finds that abnormal returns around filings of insider purchases are greater after the Sarbanes-Oxley Act (SOX) than before it, while in insider sales, stock returns are not more negative. Therefore, this paper explores whether the underlying option impacts an insider’s propensity to purchase and sell before corporate announcements.