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
Date Written: February 2001
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: Suggested Citation