The Role of Option Markets in Shareholder Activism

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