Information, Trading, and Product Market Interactions: Cross-sectional Implications of Informed Trading

Authors

  • HEATHER E. TOOKES

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    • Heather E. Tookes is at the Yale School of Management. This paper is based on part of my dissertation at Cornell University. I am extremely grateful to Maureen O'Hara (Chair), David Easley, Robert Masson, and Roni Michaely for many helpful discussions. I would also like to thank Warren Bailey, Carliss Baldwin, Scott Bauguess, Sudipto Bhattacharya, Judith Chevalier, Joshua Coval, John Griffin, Michael Hertzel, Kenneth Kavajecz, Norris Larrymore, Jonathan Macey, Adam Reed, David Scharfstein, Matthew Spiegel, Robert Stambaugh (the editor), Laura Starks, Bhaskaran Swaminathan, Eric Theissen, Nancy Wallace, James Weston, an anonymous referee, and seminar participants at Cornell University, the 2003 European Finance Association Meetings, Arizona State, Yale School of Management, University of California-Berkeley, Stanford, Harvard, University of North Carolina-Chapel Hill, the 2004 American Finance Association Meetings, the 2004 Batten Finance Conference, Yale Law School, and Massachusetts Institute of Technology-Sloan for their useful suggestions. Any errors are my own.

ABSTRACT

I present a simple model of informed trading in which asset values are derived from imperfectly competitive product markets and private information events occur at individual firms. The model predicts that informed traders may have incentives to make information-based trades in the stocks of competitors, especially when events occur at firms with large market shares. In the context of 759 earnings announcements, I use intraday transactions data to test the hypothesis that net order flow and returns in the stocks of nonannouncing competitors have information content for announcing firms.

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