Options Trading and Stock Price Informativeness

Abstract

We find that single-name options trading increases the absolute level of information content of prices (stock price informativeness). We confirm our results through instrumental variable approach to control for potential endogeneity. We further show causality by using a difference-in-difference approach using regulatory changes as an exogenous shock on equity options trading volume. Our findings are through the channels of investors’ acquiring more information and through managers’ information disclosure. The findings are driven by firms with higher information asymmetry and firms with more efficiently priced options. Options listings in a sample of 25 other countries also lead to higher price informativeness.

Keywords: option trading, price informativeness, stock synchronicity, information acquisition and production

JEL Classification: G02, G12, G13, G14