Do prices reveal the presence of informed trading?
Associate Professor Slava Fos,
10th May 2013 11:30 am - Room 214/215 H69
Using a comprehensive sample of trades by Schedule 13D filers, who possess valuable private information when they accumulate stocks of targeted companies, this paper studies whether several measures of adverse selection reveal the presence of informed trading. The evidence suggests that when Schedule 13D filers accumulate shares, both high-frequency and low-frequency measures of stock liquidity and adverse selection indicate higher stock liquidity and lower adverse selection, even though prices are positively affected. We document three channels that help explain this phenomenon: (a) informed traders select times of higher liquidity when they trade, (b) liquidity increases in response to informed traders' trades, (c) informed traders use limit orders.