Options Trading, Managerial Risk-taking, and Brand Development

73 Pages Posted: 15 Jan 2018 Last revised: 12 Oct 2023

See all articles by Po-Hsuan Hsu

Po-Hsuan Hsu

National Tsing Hua University - Department of Quantitative Finance; National University of Singapore (NUS) - Asian Bureau of Finance and Economic Research (ABFER)

Fengfei Li

Deakin University - Deakin Business School

Yoshio Nozawa

University of Toronto

Date Written: October 10, 2023

Abstract

This study examines the relationship between options trading and brand development in firms. High-option firms tend to introduce more new trademarks, but this increase is associated with a decline in trademark quality, as evidenced by lower cited rates. They also lean towards brand creation over extension, leading to higher brand riskiness, reflected in trademark diversity and the standard deviation of forward citations across new trademarks. These effects are more pronounced in firms with weaker governance, managers exhibiting higher pay-risk sensitivity, and younger managerial teams. Furthermore, uncited trademarks (those with zero forward citations) negatively impact firm value, especially in high-option firms, while cited trademarks have a positive impact. Our findings remain robust across different specifications and when considering managerial hedging transactions. Notably, these effects are more significant in non-high-tech industries. Overall, our results support the ‘risk-taking channel,’ suggesting that active options markets incentivize managers to pursue risky brand development.

Keywords: brand development; options trading; trademark; brand creation

JEL Classification: G14, G30, O34

Suggested Citation

Hsu, Po-Hsuan and Li, Fengfei and Nozawa, Yoshio, Options Trading, Managerial Risk-taking, and Brand Development (October 10, 2023). Available at SSRN: https://ssrn.com/abstract=3101881 or http://dx.doi.org/10.2139/ssrn.3101881

Po-Hsuan Hsu

National Tsing Hua University - Department of Quantitative Finance ( email )

101, Section 2, Kuang-Fu Road
Hsinchu, Taiwan 300
China

National University of Singapore (NUS) - Asian Bureau of Finance and Economic Research (ABFER) ( email )

BIZ 2 Storey 4, 04-05
1 Business Link
Singapore, 117592
Singapore

Fengfei Li (Contact Author)

Deakin University - Deakin Business School ( email )

Australia

Yoshio Nozawa

University of Toronto ( email )

105 St George St
Toronto, ON M5S3E6
Canada
3013125569 (Phone)

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