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

Posted: 27 Aug 2001

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 1, 2001

Abstract

Early studies find that option introductions tend to raise the price of underlying stocks. More recent research indicates that 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 documented abnormal returns and changes in short interest around option listings are consistent with the mitigation of short-sale constraints resulting from the option introduction, and that both the abnormal returns and short interest changes around listing dates can be predicted using ex-ante characteristics of the underlying stock.

Keywords: Options, short-sales, effect of options on stock prices

JEL Classification: G12, G14

Suggested Citation

Danielsen, Bartley R. and Sorescu, Sorin M., Why Do Option Introductions Depress Stock Prices? A Study of Diminishing Short-Sale Constraints (February 1, 2001). Journal of Financial and Quantitative Analysis, Forthcoming. Available at SSRN: https://ssrn.com/abstract=268860

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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