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The effect of option trading

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  • Keming Li

    (A&M University-San Antonio)

Abstract

This paper studies the effect of option trading on corporate investment and financing policies. Based on prior literature, I hypothesize that option market induces informed trading and thus reduces information asymmetry and the cost of capital. As a result, firms with high option trading have more investment and financing. Specifically, based on the United States public data, this paper finds that option trading volume increases corporate investment and financing, but reduces cash holdings and corporate payouts. These results are robust to the inclusion of industry or firm fixed effect, a control for endogenous options trading, and the use of alternative measures of option trading and corporate policies. The effect of option trading is stronger for firms with higher information asymmetry problems. Finally, this paper finds the results are inconsistent with the “quiet Life” hypothesis and the catering hypothesis.

Suggested Citation

  • Keming Li, 2021. "The effect of option trading," Financial Innovation, Springer;Southwestern University of Finance and Economics, vol. 7(1), pages 1-32, December.
    • Handle: RePEc:spr:fininn:v:7:y:2021:i:1:d:10.1186_s40854-021-00279-5
    DOI: 10.1186/s40854-021-00279-5
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    More about this item

    Keywords

    Option trading; Corporate policies; Investment and financing;
    All these keywords.

    JEL classification:

    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G35 - Financial Economics - - Corporate Finance and Governance - - - Payout Policy

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