Informed options trading around US FDA announcements

Transcription

1 Informed options trading around US FDA announcements MARC J. M. BOHMANN* and VINAY PATEL* University of Technology Sydney January 14, 2018 Abstract We provide the first examination of informed trading in options markets around a sample of 2,252 Food & Drug Administration announcements from 273 US listed-firms between 1996 and Using implied volatility spreads as a proxy for informed trading, we find: i) informed traders are aware of the upcoming announcement at least five days in advance, and ii) at least some informed traders have knowledge of the more specific contents of the announcement. Our findings have implications for regulators, investors and relevant firms. JEL Classifications: G10, G14, L65 Keywords: FDA, options, informed trading, implied volatility * marc.bohmann@student.uts.edu.au and vinay.patel@uts.edu.au.

2 1. Introduction The Food & Drug Administration (FDA) is a regulator in the United States of America which has the aim of protecting the public from the use of a wide range of products valued in excess of $2.4 trillion. These products include: food, drugs, biologics, medical devices/products, electronic products, cosmetics, veterinary products and tobacco products. 1 Given the extremely important role that the FDA has for consumers, firms and investors, little is known about the market reaction of FDA announcements. There exist few, dated studies which find a marginal stock market reaction to FDA approval announcements of 0%-2% using a sample period ranging between 1962 and 2001 (Bosch and Lee, 1994; Torabzadeh, Woodruff and Sen, 1998; Chaney, Devinney and Winer, 1991; Sharma and Lacey, 2004). The most recent study by Sarkar and de Jong (2006) decomposes FDA announcements into approvals and rejections and finds abnormal announcement returns of 3.50% and -3.60%, respectively, with an amplified reaction for smaller firms. A recent stream of literature provides support for options being an important venue for informed trading and thus at times options play an important role in reflecting new information before stock prices. This evidence begins with a sequential trading model developed by Easley, O Hara and Srinivas (1998) informed traders will trade in options for sufficient levels of liquidity and leverage of options contracts. Second, several studies find that future stock returns can be predicted from options volume or order imbalance (Pan and Poteshman, 2006; Johnson and So, 2012; Ge, Lin and Pearson, 2016). Third, numerous studies report evidence of abnormal options returns, volume or implied volatility prior to a variety of corporate news announcements (Roll, Schwartz and Subrahmanyam, 2010; Christophe, Ferri and Hsieh, 2010; Chan, Ge and Lin, 2015; Hao, 2016). Furthermore, Patel, Putnins, Michayluk and Foley (2017) develop their own measure information leadership indicator and find that at least one-third of price discovery occurs in options markets, this estimate is up to five times larger than reported in prior studies. 2 Therefore given the importance of the FDA in its role to society, the limited analysis of FDA announcements to date, and stringent battery of literature supporting options as an important venue for informed trading, raises the following question: does informed trading take place in options markets around FDA announcements? We make a unique contribution to the literature, as to the best of our knowledge we conduct the first examination of informed options trading around FDA announcements. The unscheduled nature of FDA announcements aids our research design, as we can cleanly capture whether investors have knowledge of the forthcoming announcement. This is in contrast to scheduled announcements, where it becomes difficult to disentangle informed trading from the general increase in uncertainty around the release date. 1 See for more details. 2 When the level of liquidity between two markets is sufficiently different, traditional measures of price discovery (e.g., the Hasbrouck (1995) information share) capture a significant amount of noise which downplays the contribution of the relatively illiquid market in price discovery. The information leadership indicator can reliably estimate price discovery between two markets with differing levels of liquidity. 2

3 We examine a large sample of 2,252 FDA new drug approvals (NDA) and drug-related announcements (which we term FDA announcements) from 273 US-listed firms between January 1, 1996 and December 31, We use the implied volatility spread developed by Cremers and Weinbaum (2010) and applied in other studies (e.g., Chan, He and Lin, 2015; Gharghari, Maberly and Nguyen, 2017) as our primary proxy for informed trading. This measure captures the price pressures from informed investor s option trades. As a secondary proxy we also consider the option-to-stock volume ratio utilized by Roll, Schwartz and Subrahmanyam (2010), Johnson and So (2012), and Chan, Ge and Lin (2015). Given the leverage advantages of options, the option-to-stock volume ratio has the ability to capture informed trades prior to the announcement date. Univariate plots show abnormal levels of implied volatility spreads in the ten-day preannouncement period, and of the option-to-stock volume ratio beginning approximately 30 days in advance of the announcement date. In support of these plots, using multivariate panel regressions to control for other factors, we report a significant increase in our proxies for informed trading (implied volatility spread/option-to-stock volume ratio) in the five day period before the announcement relative to a 50-day control period [-60,-11], indicative of the fact that at least some traders have knowledge of the forthcoming FDA announcement. In addition, using cross-sectional regressions we show that some traders are informed about the finer details of the announcement (for example, positive or negative news, type of FDA announcement, etc), as we report a statistically positive and significant relation between pre-announcement abnormal implied volatility spreads and FDA abnormal announcement returns. Given the large number of FDA announcements that occur this study will be of interest to regulators, investors and relevant pharmaceutical/other related firms. We are the first to examine and report informed trading in options markets around FDA announcements, this will be of concern to regulators and investors regarding the fairness of markets and the potential negative effects this could have upon investor s willingness to trade and thus market liquidity. Pharmaceutical and other related firms should also be concerned by the leakage of information and may want to revise their corporate governance practices, in particular the individuals that are trusted with such material information. Our findings are also informative to regulators as they increase our knowledge of informed trading strategies, in particular where and when such investors choose to trade. Our findings contribute to the growing body of literature which reports the abnormal behaviour of returns, volume/open interest, and implied volatility spreads/skews in options markets around corporate announcements, for example, around earnings releases (Amin and Lee, 1997; Roll, Schwartz and Subrahmanyam, 2010; Jim, Livnat and Zhang, 2012; Johnson and So, 2012), takeovers (Jayaraman, Frye and Sabhewal, 2001; Cao, Chen and Griffin, 2005; Acharya and Johnson, 2010; Podolski, Truong and Veeraraghavan, 2013; Barraclough, Robinson, Smith and Whaley, 2013; Augustin, Brenner and Subrahmanyam, 2015; Chan, Ge and Lin, 2015), divestitures (Augustin, Brenner, Hu, and Subrahmanyam, 2015; Patel and Michayluk, 2016), repurchases (Hao, 2016), stock 3

4 splits (Gharghori, Maberly and Nguyen, 2017), stock issues (Henry and Koski, 2010), and analyst reports (Christophe, Ferri and Hsieh, 2010; Hayunga and Lung, 2014; Lin and Lu, 2014). Holistically, the evidence to date suggests informed trading in options markets is a pervasive issue. The remainder of the paper proceeds with a description of the data and methodology in Section 2, Section 3 reports and discusses our results, and finally Section 4 concludes. 2. Data and Methodology 2.1. Data and sample Daily US options data is extracted from the OptionMetrics IvyDB US database and corresponding stock data is obtained from the CRSP and Compustat databases between January 1, 1996 and December 31, For the same sample period, we obtain FDA announcements from the FDA drug database accessible via We merge FDA announcement data with OptionMetrics/CRSP data by ticker and company name, which results in a final sample of 273 companies during our 20-year sample period. <Table 1 here> Table 1 shows the breakdown of the different types of FDA announcements which are attributed to 273 companies in our sample. The FDA has twelve categories of announcements including Efficacy and Medical Gas, the most common of which are New dosage forms (829/2,252 or 37%). A large majority of announcements have a standard priority (1,703/2,252 or 76%), and are made by pharmaceutical companies with a Standard Industrial Classification (SIC) code of 2834 (1,077/2,252 or 48%). 3 During our sample the number of FDA announcements per year decreased from 143 in 1996 to a minimum of 73 in 2007, before increasing to a maximum of 225 in 2015 (see Table 2). <Table 2 here> 2.2. Informed trading measures We use two proxies to capture informed trading around FDA announcements. Our primary proxy is the implied volatility spread (IV spread). Cremers and Weinbaum (2010) explain that a widening of IV spreads can proxy for informed trading. For example, when investors possess positive news they may buy call options and/or sell put options, this will increase the spread between call and put prices and thus increase the IV spread (given the positive relation between option price and implied 3 Priority announcements are defined as a drug that demonstrates the potential to provide a significant improvement in the safety or effectiveness of the treatment, diagnosis, or prevention of a serious or lifethreatening condition from a drug that does not demonstrate such a potential (FDA MAPP Rev. 2 Review Designation Policy). Extended NDA classification code definitions can be accessed in the FDA Manual of Policies and Procedures (MAPP)

5 volatility). A similar argument applies when investors have negative information. We calculate a weighted IV spread for each stock-day ( ): ( ) (1) where and is the implied volatility for call and put options computed by OptionMetrics, is the total number of put-call pairs per stock-day, and is the average of the open-interest between the call and put options for each put-call pair. OptionMetrics calculate the implied volatility for options on individual stocks using a binomial tree to account for discrete dividend payments and the early exercise premium. As a secondary proxy we use the ratio of option volume-to-stock volume (O/S ratio) documented by Roll, Schwartz and Subrahmanyam (2010), Johnson and So (2012) and Chan, Ge and Lin (2015). Roll, Schwartz and Subrahmanyam (2010) report an increase in the O/S ratio prior to earnings announcements which is indicative of informed trading occurring in options markets. Chan, Ge and Lin (2015) show a positive relation between the pre-announcement O/S ratio and announcement returns of the acquiring firm. If investors have positive news they may buy call options and/or sell put options, in either case this increases option trading volume and hence the O/S ratio. A similar mechanism applies for negative news. We calculate the O/S ratio for each stock-day: (2) where is the total volume across all available options, and is the total stock volume multiplied by 100 to account for the fact that each option contract controls 100 shares. In the construction of these informed trading measures, we follow Hao (2016) and apply the following filters: i) we exclude options with a daily average quoted spread of greater than 50%, zero open interest, and an absolute delta of smaller than 0.02 and greater than 0.98, and ii) we examine options for complete put-call pairs only. Also following Hao (2016), we calculate abnormal values of each measure by taking the difference between the daily option trading measure (i.e., IV spread or O/S ratio) during the event period [-10,+10] and the average value of the option trading measure during the control period [-60,- 11]:, (3) 5

6 where is either the IV spread or O/S ratio. The announcement date is day 0 and the preannouncement period is [-5,-1]. 3. Results 3.1. Descriptive statistics Table 3 reports descriptive statistics. Our analysis focuses on larger stocks by construction (i.e., stocks which have listed options), this is evident as the average daily stock volume is more than nine million shares with the average firm having approximately 900,000 shares outstanding. Consistent with many studies (e.g., Patel et al., 2017) option trading volume is much smaller than stock volume, the average option-to-stock ratio is 5% for our sample. The average implied volatility is approximately 50% indicating a significant amount of future volatility, and the average IV spread is positive indicating traders often buy calls or sell put options. <Table 3 here> 3.2. Abnormal behaviour of option trading measures We report in Figure 1 plots of the average abnormal behaviour of IV spreads and the O/S ratio during the following event periods [ ] and [-30,+10], respectively, where dotted lines indicate 95% confidence intervals around the average value. Table 4 quantifies these results. Figure 1 Panel A shows that the abnormal IV spread is positive during the [-10,-1] period, initially reaching a maximum of approximately 0.10% on day -9, and again rising from almost 0% to 0.05% between day -4 and day 0. For three days following the announcement, the abnormal IV spread is above 0.05%, before falling to 0% by day +8. < Figure 1 here > < Table 4 here > Figure 1 Panel B shows a steady increase in the abnormal O/S ratio from on day -30 and increasing to 0.05 on the unscheduled announcement date. Following the announcement, the O/S remains elevated at around Taken together, the abnormal behaviour of IV spreads and the O/S ratio provides initial evidence that there is informed trading in options markets prior to FDA announcements. In contrast to Hao (2016) who examines repurchase announcements, we show that both IV spreads and the O/S ratio show abnormal increases prior to and around FDA announcements, indicating information revelation through both quote revisions by market makers (IV spread) and 6

7 through market orders (O/S ratio). In the following sections, we investigate the prevalence of informed trading in options using multivariate regression analysis Multivariate regressions Following our univariate results, we use multivariate regressions to control for other factors and examine whether informed options trading takes place prior to FDA announcements. Using stock-day observations during the window [-60,0], we estimate the following panel:, (4) where is in model 1 and in model 2. is a dummy variable equal to 0 during the control period [-60,-11] and equal to 1 during the pre-announcement period [-5,- 1]. We include the following control variables: is the one-day lagged excess stock return from the CRSP value-weighted index return, is the absolute value of, is the one-day lagged value of the dependent variable, is the one-day lagged ratio of option volume to stock volume. In addition, we include year fixed effects. < Table 5 here > We report the regression results in Table 5. In both models 1 and 2 the is positive and significant, indicating that both IV spreads and the O/S ratio are significantly larger in the preannouncement period [-5,-1] when compared to the control period [-60,-11]. Our results are consistent with informed trading taking place in options prior to the FDA announcement. For example, controlling for other factors, prior to the announcement, the average IV spread increases by 0.80% and the average O/S ratio increases by 0.30%. Our results so far suggest that there is information leakage prior to the FDA announcement date. If traders are aware of finer details of the information content of the FDA announcement, for example, classification or priority of the announcement, we should observe a positive correlation between IV spreads or the O/S ratio in the pre-announcement period and the announcement date returns. We test this hypothesis using the following cross-sectional regressions:, (5) where is the abnormal return on the announcement date which is calculated as the difference between the stock return and the CRSP value-weighted index. is the average abnormal 7

8 option trading measure during the pre-announcement period [-5,-1], we use in model 1 and in model 2. We include the following control variables: is the difference between the stock return and the CRSP value-weighted index return during the preannouncement period [-5,-1], ( ) is the daily trading stock (option) volume on the announcement date, is the average delta of the call option during the preannouncement period [-5,-1], is the stock return volatility during the control period [-60,- 11], is the ratio of option volume-to-stock volume on the announcement date, is the ratio of stock volume to the number of shares outstanding on the announcement date, is the market capitalization of the firm at the end of the fiscal year prior to the announcement expressed in log form. Again, we include year fixed effects. < Table 6 here > Using abnormal IV spreads as the informed trading proxy in Table 6 Model 1, we observe a positive and significant coefficient of for the variable (t-statistic of 13.01), this suggests that at least some informed traders have knowledge of some the finer details of the FDA announcement. This result controls for a range of factors, for example, stock returns, volume and volatility, as some studies report that option prices are not informative about the underlying asset value. In contrast, the coefficient in Model 2 shows an insignificant relation between abnormal announcement returns and the abnormal O/S ratio. Taking the results in this section together, the O/S ratio indicates that some traders have knowledge of the upcoming announcement (observed in Table 5), however, such option volume is not informative about the contents of the FDA announcement. In future analysis we aim to separately examine the information content of call and put option volume. Our O/S ratio results are the exact reverse of Hao (2016) options volume suggests that few traders have knowledge of the upcoming repurchase announcement, however, such volume contains information content of the repurchase agreement. Similarly to Hao (2016), the behaviour of the IV spread suggests that informed traders have knowledge of the details of the upcoming announcement. We find mixed results using the O/S ratio. One potential explanation for such results is that market makers and liquidity providers update their quotes to reflect their information about the announcement, such a finding is consistent with a range of studies which report that informed traders have a preference for trading using limit orders, rather than market orders (Hasbrouck, 1991; Brogaard et al., 2015). 4. Conclusion 8

9 Our paper is the first to report evidence of informed trading in options markets prior to FDA announcements. As evidenced by abnormal increases in IV spreads and the O/S ratio, we find that some traders have knowledge of the forthcoming announcement. Using multivariate cross-sectional regressions, we document a positive relation between pre-announcement abnormal IV spreads and abnormal announcement returns, this finding suggests that at least some traders are privy to the contents of the FDA announcement. This study will be of interest to regulators, investors and relevant firms. Our findings add to the growing number of studies which document informed trading prior to corporate announcements in stock and options markets, regulators should be concerned by the pervasive leakage of information. If some investors are privy to inside information, that is, inequity in trading, then this can have negative effects on investor s willingness to trade and the liquidity of markets. Firms which make FDA announcements should also be concerned by the leakage of information and may want to revise their corporate governance practices, in particular the individuals that are trusted with such material information. 9

10 References Acharya, Viral V., Timothy C. Johnson, 2010, More insiders, more insider trading: Evidence from private-equity buyouts, Journal of Financial Economics 98, Amin, Kaushik, and Charles C. Lee, 1997, Option trading, price discovery and earnings news dissemination, Contemporary Accounting Research 14, Augustin, Patrick, Menachem Brenner, Marti G. Subrahmanyam, 2015, Informed options trading prior to M&A announcements: Insider trading?, Working paper, McGill University, New York University. Augustin, Patrick, Menachem Brenner, Jianfeng Hu, Marti G. Subrahmanyam, 2015, Are corporate spin-offs prone to insider trading?, Working paper, McGill University, New York University, Singapore Management University. Barraclough, Kate, David T. Robinson, Tom Smith, Robert E. Whaley, 2013, Using option prices to infer overpayments and synergies in M&A transactions, Review of Financial Studies 26, Black, Fischer, 1975, Fact and Fantasy in the Use of Options, Financial Analysts Journal 31, Blau, Benjamin M., Nga Nguyen, and Ryan J. Whitby, 2014, The information content of option ratios, Journal of Banking & Finance 43, Bosch, Jean-Claude, and Insup Lee, 1994, Wealth effects of Food and Drug Administration (FDA) decisions, Managerial and Decision Economics 15, Brogaard, Jonathan, Terrence Hendershott, and Ryan Riordan, Price discovery without trading: Evidence from limit orders, Working paper, University of Washington, University of California, Queen s School of Business. Cao, Charles, Zhiwu Chen, and John M. Griffin, 2005, Informational content of option volume prior to takeovers, Journal of Business 78, Chakravarty, Sugato, Huseyin Gulen, and Stewart Mayhew, 2004, Informed trading in stock and option markets, The Journal of Finance 59, Chan, Konan, Li Ge, and Tse-Chun Lin, 2015, Informational content of options trading on acquirer announcement return, Journal of Financial and Quantitative Analysis 50, Chaney, Paul K., Timothy M. Devinney, and Russell S. Winer, 1991, The impact of new product introductions on the market value of firms, Journal of Business, Christophe, Stephen E., Michael G. Ferri, and Jim Hsieh, 2010, Informed trading before analyst downgrades: Evidence from short sellers, Journal of Financial Economics 95, Cremers, Martijn, and David Weinbaum, 2010, Deviations from put-call parity and stock return predictability, Journal of Financial and Quantitative Analysis 45, Easley, David, Maureen O Hara, and Pulle Subrahmanya Srinivas, 1998, Option volume and stock prices: Evidence on where informed traders trade, The Journal of Finance 53,

11 Ge, Li, Tse-Chun Lin, and Neil D. Pearson, 2016, Why does the option to stock volume ratio predict stock returns?, Journal of Financial Economics 120, Gharghori, Philip, Edwin D. Maberly, and Annette Nguyen, 2017, Informed trading around stock split announcements: Evidence from the option market, Journal of Financial and Quantitative Analysis 52, Hasbrouck, Joel, 1991, The summary informativeness of stock trades: An econometric analysis, Review of Financial Studies 4, Hasbrouck, Joel, 1995, One security, many markets: Determining the contributions to price discovery, Journal of Finance 50, Hayunga, Darren K., and Peter P. Lung, 2014, Trading in the options market around financial analysts consensus revisions, Journal of Financial and Quantitative Analysis 49, Henry, Tyler R, and Jennifer L. Koski, 2010, Short selling around seasoned equity offerings, Review of Financial Studies 23, Himmelmann, Achim, and Dirk Schiereck, 2012, Drug approval decisions: A note on stock liquidity effects, Journal of Empirical Finance 19, Jayaraman, Narayanan, Melissa B. Frye, and Sanjiv Sabherwal, 2001, Informed trading around merger announcements: An empirical test using transaction volume and open interest in options market, Financial Review 36, Jin, Wen, Joshua Livnat, Yuan Zhang, 2012, Option prices leading equity prices: Do option traders have an information advantage?, Journal of Accounting Research 50, Johnson, Travis L., and Eric C. So, 2012, The option to stock volume ratio and future returns, Journal of Financial Economics 106, Lin, Tse-Chun, and Xiaolong Lu, 2015, Why do options prices predict stock returns? Evidence from analyst tipping, Journal of Banking & Finance 52, Pan, Jun, Allen M. Poteshman, 2006, The information in option volume for future stock prices, Review of Financial Studies 19, Patel, Vinay, Talis Putnins, David Michayluk, and Sean Foley, 2017, Price discovery in stock and options markets, Working paper, University of Technology Sydney. Patel, Vinay, and David Michayluk, 2016, Do divestitures create value? Evidence from options markets, Working paper, University of Technology Sydney. Qing, Hao, 2016, Is there information leakage prior to share repurchase announcements? Evidence from daily options trading, Journal of Financial Markets 27, Roll, Richard, Eduardo Schwartz, and Avandhir Subrahmanyam, 2010, O/S: the relative trading activity in options and stock, Journal of Financial Economics 96, Sarkar, Salil K., and Pieter J. de Jong, 2006, Market response to FDA announcements, The Quarterly Review of Economics and Finance 46,

12 Sharma, Anurag, and Nelson Lacey, 2004, Linking product development outcomes to market valuation of the firm: The case of the US pharmaceutical industry, Journal of Product Innovation Management 21, Torabzadeh, Khalil M., Criss G. Woodruff, and Nilanjan Sen, 1998, FDA decisions on new drug applications and the market value of pharmaceutical firms, American Business Review 16, 42. Xing, Yuhang, Xiaoyan Zhang, and Rui Zhao, 2010, What does the individual option volatility smirk tell us about future equity returns?, Journal of Financial and Quantitative Analysis 45,

13 Figure 1. Abnormal behaviour of IV spreads and O/S ratio around FDA announcements This figure illustrates the average abnormal IV spread (Panel A) and abnormal O/S ratio (Panel B) around our sample of US FDA announcements made by 273 firms between January 1, 1996 and December 31, We calculate abnormal values of each option trading measure as the difference between the daily option trading measure during the event period [-10,+10] and the average of the option trading measure during the control period [-60,-11]. Dashed lines indicate the 95% confidence intervals. The horizontal axis expresses days relative to the announcement day 0. In Panel A (B) we report the abnormal behaviour of option measures during a [- 10,+10] ([-30,+10]) window. Panel A: Abnormal IV spread Panel B: Abnormal O/S ratio

14 Table 1. Classification of FDA announcements This table reports the number and classification of FDA announcements for our sample of 273 firms between January 1, 1996 and December 31, The FDA determines standard and priority classifications internally. Priority announcements are for drugs that demonstrate the potential to provide a significant improvement in medical practices. In cases where an FDA announcement is attributed to multiple classifications, we attribute the announcement to the first mentioned classification. Rx to OTC switch describes the change of a drug s status from requiring a practitioner prescription due to its toxicity or potential harm to the permission of over-thecounter (OTC) sales. Drugs classified as Efficacy are performance-enhancing supplements. Pharmaceutical companies are classified by SIC code Classification All approvals Standard Priority Unknown 1) New molecular entity ) New active ingredient ) New dosage form ) New combination ) New formulation or new manufacturer ) New indication (no longer used, 11/2010) ) Drug already marketed w/o approved NDA ) Partial Rx to OTC switch ) New indication submitted as distinct NDA, consolidated with original NDA after approval 10) New indication submitted as distinct NDA - not consolidated ) Efficacy ) Medical gas ) No classification Total 2,252 1, Total (Pharmaceutical companies only) 1,

15 Table 2. FDA announcements during our sample period This table reports the number of FDA announcements for our sample of 273 firms between January 1, 1996 and December 31, 2016 on an annual basis. The FDA determines standard and priority classifications internally. Priority announcements are for drugs that demonstrate the potential to provide a significant improvement in medical practices. Year of approval All approvals Standard Priority Unknown Total 2,252 1,

16 Table 3. Descriptive statistics This table shows descriptive statistics of options and stock trading variables for our sample of 273 firms between January 1, 1996 and December 31, is daily volume (in millions), is daily stock return (%), is daily number of shares outstanding, is daily volume, is daily open interest, is daily implied volatility. is daily open-interest weighted average difference between the implied volatility of calls and puts for each putcall-parity pair, is the daily ratio of option to stock volume. The implied volatility- and volume-based measures are scaled by the factor 100. We apply the following filters to the data: i) we exclude options with a daily average quoted spread of greater than 50%, zero open interest, and an absolute delta of smaller than 0.02 and greater than 0.98, ii) we include options which have a matching call and put pair with the same expiration date and strike price. Variable Mean Median Std. Dev , ,194 1,723, , , , ,

17 Table 4. Descriptive statistics of stock and option trading variables during FDA announcements This table shows the average of stock and options trading variables during the pre-announcement window [-5,- 1] and on the announcement day 0 for our sample of 273 firms between January 1, 1996 and December 31, is the daily open-interest weighted average difference between the implied volatility of calls and puts for each put-call-parity pair, is the daily average ratio of option to stock volume, is the average daily stock return (%). We calculate abnormal values of each option trading measure ( and ) as the difference between the daily option trading measure and the average of the option trading measure during the control period [-60,-11], similarly we calculate. is the average daily volume across both put and call options, is the average daily stock volume. The implied volatility- and volume-based measures are scaled by the factor 100. We apply the following filters to the data: i) we exclude options with a daily average quoted spread of greater than 50%, zero open interest, and an absolute delta of smaller than 0.02 and greater than 0.98, ii) we include options which have a matching call and put pair with the same expiration date and strike price. [-5,-1] [0] Mean Median Std. Dev. Mean Median Std. Dev , , ,059 17

18 Table 5. Are option trading variables abnormally larger prior to FDA announcements? This table reports coefficient estimates from the following panel regression using stock-day observations during the window [-60,0]:, where is in model 1 and in model 2. is a dummy variable equal to 0 during the control period [-60,-11] and equal to 1 during the pre-announcement period [-5,-1]. We include the following control variables: is the one-day lagged excess stock return from the CRSP valueweighted index return, is the absolute value of, is the one-day lagged value of the dependent variable, is the one-day lagged ratio of option volume to stock volume. We include year fixed effects. The sample comprises 273 firms between January 1, 1996 and December 31, t-statistics are reported in parentheses. ***, **, and * indicate statistical significance at the 1%, 5%, and 10% level, respectively. Model 1 Model (-28.01)*** (16.43)*** (-0.16) (-0.13) (2.98)*** (13.02)*** (34.73)*** (2.36)** (0.38) (0.39) (2.50)*** 1,973,859 2,765,

19 Table 6. Do informed traders have knowledge of the contents of the FDA announcement? This table reports coefficient estimates from the following cross-sectional regression using stock-day observations:, where is the abnormal return on the announcement date which is calculated as the difference between the stock return and the CRSP value-weighted index. is the average abnormal option trading measure during the pre-announcement period [-5,-1], we use in model 1 and in model 2. We include the following control variables: is the difference between the stock return and the CRSP value-weighted index return during the pre-announcement period [-5,-1], ( ) is the daily trading stock (option) volume on the announcement date, is the average delta of the call option during the pre-announcement period [-5,-1], is the stock return volatility during the control period [-60,-11], is the ratio of option volume to stock volume on the announcement date, is the ratio of stock volume to the number of shares outstanding on the announcement date, is the natural logarithm of market capitalization of the firm at the end of the fiscal year prior to the announcement. We include year fixed effects. The sample comprises 273 firms between January 1, 1996 and December 31, t-statistics are reported in parentheses.***, **, and * indicate statistical significance at the 1%, 5%, and 10% level, respectively. Model 1 Model (13.01)*** (16.21)*** (1.45) (0.41) (-5.25)*** (-35.70)*** (-1.08) (-10.81)*** (-3.25)*** (-1.22) (17.81)*** (2.09)** (0.1) (-5.79)*** (-40.56)*** (-10.55)*** (-5.11)*** 93, ,216 (%)