Options Listing, Limited Attention and Peer Firm Value

Abstract

This paper studies the effect of listing of equity options on industry peer stock prices and firm value. I find that options listing leads to a decline in information acquisition on peer firms as investors reallocate more of their limited resources towards listed stocks at the expense of peer stocks following listing. This reallocation leads to a decline in informational efficiency and market quality for peer stocks. Further, lower informational efficiency negatively affects firm value and profitability for peer firms. Contrary to the extant literature, these findings highlight a negative externality generated by options listing on the stock market which have important implications for industry peer firms.

Keywords: Options, Options Listing, Limited Attention, Informational Efficiency, Firm Value

JEL Classification: G14, G10