Options trading and firm investment efficiency
Charles Hsu
School of Business and Management, Hong Kong University of Science and Technology, Kowloon, Hong Kong
Search for more papers by this authorJunqiang Ke
School of Accountancy, Central University of Finance and Economics, Beijing, China
Search for more papers by this authorZhiming Ma
Guanghua School of Management, Peking University, Beijing, China
Search for more papers by this authorCorresponding Author
Lufei Ruan
Lam Family College of Business, San Francisco State University, San Francisco, California, USA
Correspondence
Lufei Ruan, Lam Family College of Business, San Francisco State University, San Francisco, CA, USA.
Email: [email protected]
Search for more papers by this authorCharles Hsu
School of Business and Management, Hong Kong University of Science and Technology, Kowloon, Hong Kong
Search for more papers by this authorJunqiang Ke
School of Accountancy, Central University of Finance and Economics, Beijing, China
Search for more papers by this authorZhiming Ma
Guanghua School of Management, Peking University, Beijing, China
Search for more papers by this authorCorresponding Author
Lufei Ruan
Lam Family College of Business, San Francisco State University, San Francisco, California, USA
Correspondence
Lufei Ruan, Lam Family College of Business, San Francisco State University, San Francisco, CA, USA.
Email: [email protected]
Search for more papers by this authorAbstract
We examine the effect of options trading on an optioned firm's investment decisions. We find that active options trading improves an optioned firm's investment efficiency, and that this effect holds under several alternative empirical specifications and identification strategies, including fixed-effects models, different matching methods, an instrumental variable approach, a Granger causality test and a quasi-natural experiment based on the listing decisions of the options exchanges. This relation is mediated by two factors, namely, information asymmetry and uncertainty, consistent with the notion that options trading improves investment efficiency by providing information that facilitates external monitoring and managerial learning. The results of cross-sectional analyses indicate that the effect of options trading on investment efficiency increases with firms’ tendency to overinvest or underinvest, and with managers’ risk-taking and learning incentives. We also demonstrate that the effect of options markets on investment efficiency is distinct from the effect of stock markets. Overall, our findings suggest that options trading plays a nonnegligible role in improving an optioned firm's investment efficiency.
Open Research
DATA AVAILABILITY STATEMENT
We obtain options trading data from OptionMetrics, stock price data from CRSP, company financial data from Compustat, analyst data from I/B/E/S and institutional ownership data from Thomson Reuters.
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