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Option Listing and Information Asymmetry

Forthcoming in the Review of Finance

86 Pages Posted: 24 Apr 2014 Last revised: 22 Feb 2017

Jianfeng Hu

Singapore Management University - Lee Kong Chian School of Business

Date Written: February 17, 2017

Abstract

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

Hu, Jianfeng, Option Listing and Information Asymmetry (February 17, 2017). Forthcoming in the Review of Finance. Available at SSRN: https://ssrn.com/abstract=2427985 or http://dx.doi.org/10.2139/ssrn.2427985

Jianfeng Hu (Contact Author)

Singapore Management University - Lee Kong Chian School of Business ( email )

50 Stamford Road
Singapore, 178899
Singapore
(+65) 68085477 (Phone)

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