Options Trading, Managerial Risk-taking, and Brand Development
73 Pages Posted: 15 Jan 2018 Last revised: 12 Oct 2023
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: Suggested Citation