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Published December 2009 | public
Journal Article Metadata-only

Options trading activity and firm valuation

Roll, Richard
Schwartz, Eduardo
Subrahmanyam, Avanidhar
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Abstract

Options may have an effect on firm value because they help complete markets and stimulate informed trades. However, these benefits are likely to manifest themselves in active, rather than inactive, options markets. Supporting this observation, we find that firms with more options trading have higher values of Tobin's q, after accounting for other determinants of value. Corporate investment in firms with greater options trading is more sensitive to stock prices. Options trading affects firm valuation more strongly in stocks with greater information asymmetry. These results indicate that options trading is positively associated with firm values as well as information production.

Additional Information

© 2009 Elsevier B.V. Received 18 December 2007, Revised 10 December 2008, Accepted 26 February 2009, Available online 12 August 2009. We thank Stephen Figlewski, a referee, and two other anonymous referees. Yakov Amihud, Robert Battalio, Sreedhar Bharath, Jennifer Carpenter, Zhi Da, John Doukas, Ned Elton, Steve Figlewski, Paul Gao, Marty Gruber, Bruce Grundy, Kose John, Marcin Kacperczyk, Robert Mendenhall, M.P. Narayanan, Paolo Pasquariello, Jonathan Paul, Lasse Pedersen, Amiyatosh Purnanandam, Uday Rajan, Nejat Seyhun, Sophie Shive, Richard Stapleton, Kathy Yuan, and seminar participants at Vienna University of Economics and Business Administration, New York University, University of Melbourne, University of Michigan, and the University of Notre Dame for valuable comments.

Additional details

Identifiers Dates
Created:
August 21, 2023
Modified:
October 20, 2023