Option Trading and Stock Price Informativeness

Abstract

We examine the impact of single-name option trading on stock price informativeness. By documenting a robust relation and establishing causality, we confirm that option trading causes the stock price to incorporate more firm-specific information. Our findings are through the channels of investors’ acquiring more information and through managers’ voluntary release. The findings are driven by firms with higher information asymmetry and firms with more efficiently priced options.

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

JEL Classification: G02, G12, G13, G14