A seminar by Associate Professor Thu Phuong Pham from Curtin University
Title: Informed Trading on Counterparty Risk
Abstract: We investigate the dynamics of informed trading in the stocks of unsecured creditors before bankruptcy announcements. We find evidence of informed selling in the pre-announcement month for 52% of the stocks of unsecured creditors. This pre-announcement informed selling attenuates the response of the creditors’ stock prices to the subsequent bankruptcy announcements, showing that information about the impending bankruptcy of the debtor and the identity of the unsecured creditors is incorporated in the unsecured creditors’ stock prices before their debtor’s official announcement date. The effect of informed selling on the creditor’s stock price response to the bankruptcy announcement is mediated by media coverage and dual-cover analyst following: media coverage reduces the effect of pre-announcement informed selling on the creditor’s stock price response, suggesting that media coverage reduces the information about the impending bankruptcy that is private and gets impounded in stock prices through informed trading. Conversely, dual-cover analysts increase the effect of pre-announcement informed selling on announcement returns by increasing the private information that is revealed by trading during the pre-announcement period.
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