The Effect of Option Listing on Financing Decisions

Abstract

This paper investigates the effect of option listing on corporate financing decisions. Firms experience a significant drop in leverage, which is mainly driven by an increase in equity issues. This effect is concentrated in firms with low profitability, high information asymmetry, and active option trading. Following the option listing, newly listed firms hold more cash and engage in more acquisitions which are mainly funded by new equity issues. These findings suggest that option listing has a significant impact on financing decisions due to lower information asymmetry and that firms use the post-listing equity to build up financial slack and support a larger investment set.

Keywords: option listing, capital structure, information asymmetry, market timing

JEL Classification: G30, G32, G34