HCBE Faculty Articles
Trading Responses to Negative Signals
Document Type
Article
Publication Title
Theoretical Economics Letters
ISSN
2162-2078
Publication Date
6-2014
Abstract/Excerpt
Mergers may be undertaken by giving shareholders of the target firm the right to exchange their stock for stock in the combined firm. Such stock mergers release the negative signal that the acquiring firm lacks cash. Informed traders seeking immediate gain may short sell acquirer stock or buy puts and sell calls. Liquidity traders, desiring longterm gain, may purchase stock or call options to benefit from lower stock prices, or sell stock or buy put options to maintain liquidity. This paper constructs a theoretical model in which option volume forms the bounds of the final stock price for informed traders while random stock purchase or sale volume establishes the final stock price for liquidity traders.
DOI
10.4236/tel.2014.46049
Volume
4
Issue
6
First Page
378
Last Page
385
NSUWorks Citation
Abraham, Rebecca; Harrington, Charlie W.; and Zikiye, Mark W., "Trading Responses to Negative Signals" (2014). HCBE Faculty Articles. 805.
https://nsuworks.nova.edu/hcbe_facarticles/805
