The Role of Option Markets in Shareholder Activism

79 Pages Posted: 7 Feb 2018 Last revised: 10 Nov 2019

Date Written: June 29, 2019

Abstract

Derivatives trading can significantly alter shareholders' choices of different corporate governance tactics. In this paper, I investigate whether financial derivative contracts such options promote or impede shareholder activism. Baseline results reveal a positive association between more liquid option markets and subsequent shareholder activism in the forms of proxy contests, shareholders proposals, or dissent voting with management. I discuss potential underlying mechanisms that channel the effect, and overall suggest that options encourage shareholder activism by facilitating the profitability of an intervention. Additionally, I find that activism encouraged by options trading seems, on average, not detrimental to firm value nor minority shareholders.

Keywords: Shareholder Activism, Options Trading, Shareholder Proposal, Institutional Shareholder Services (ISS)

JEL Classification: G12, G23, G30

Suggested Citation

García, Sergio J., The Role of Option Markets in Shareholder Activism (June 29, 2019). Available at SSRN: https://ssrn.com/abstract=3113228 or http://dx.doi.org/10.2139/ssrn.3113228

Sergio J. García (Contact Author)

Comillas Pontifical University ( email )

Alberto Aguilera 21
Madrid, Madrid 28015
Spain

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