Option Listing and Information Asymmetry
Forthcoming in the Review of Finance
86 Pages Posted: 24 Apr 2014 Last revised: 22 Feb 2017
Date Written: February 17, 2017
Option listing increases informed and uninformed trading by 12.4% and 23.9%, respectively, in the US between 2001 and 2010, hence reducing relative information risk. We establish the causal effects using control stocks with similar propensities of listing and a quasi-natural experiment using option listing standards. The benefits are more prominent for stocks with active options trading and opaque stocks. The reduction of information risk is larger for good news than bad news, and the stock price response to earnings surprise weakens after listing. The results suggest that options improve the overall market information environment beyond substitutional effects to stock trading.
Keywords: Option listing, information asymmetry, order flow, probability of informed trading, liquidity shocks
JEL Classification: C13, C61, D82, G14
Suggested Citation: Suggested Citation