Why Do Option Introductions Depress Stock Prices? An Empirical Study of Diminishing Short-Sale Constraints

DePaul University Working Paper

46 Pages Posted: 9 May 2000

See all articles by Bartley R. Danielsen

Bartley R. Danielsen

North Carolina State University - Poole College of Management

Sorin M. Sorescu

Texas A&M University - Department of Finance

Date Written: February 2001

Abstract

Early studies find that option introductions tend to raise the price of underlying stocks. More recent research indicates post-1980 option introductions are associated with negative abnormal returns in underlying stocks. Other studies document increased short-sale activities following option listing. This paper provides evidence that the recently documented negative abnormal returns and increased short interest are consistent with the mitigation of short-sale constraints resulting from the option introduction. We further show that the stock price reaction and changes in short interest around options listing can be predicted using ex-ante characteristics of the underlying stock.

JEL Classification: D82, G12, G13

Suggested Citation

Danielsen, Bartley R. and Sorescu, Sorin M., Why Do Option Introductions Depress Stock Prices? An Empirical Study of Diminishing Short-Sale Constraints (February 2001). DePaul University Working Paper. Available at SSRN: https://ssrn.com/abstract=204590 or http://dx.doi.org/10.2139/ssrn.204590

Bartley R. Danielsen

North Carolina State University - Poole College of Management ( email )

Hillsborough Street
Raleigh, NC 27695-8614
United States
919-513-3003 (Phone)

Sorin M. Sorescu (Contact Author)

Texas A&M University - Department of Finance ( email )

430 Wehner
College Station, TX 77843-4218
United States
979-458-0380 (Phone)

HOME PAGE: http://wehner.tamu.edu/finc.www/ssorescu/

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