Real Effects in the Option Market

37 Pages Posted: 25 Nov 2020

See all articles by Botong Shang

Botong Shang

University of Rochester - Simon Business School

Date Written: October 12, 2020


I investigate whether and how managers extract private information from the option market to guide investment decisions. The level of private information is negatively associated with the sensitivity of both investment amount and timing to implied volatility. This finding is consistent with the real options theory, where managers extract market-expected uncertainty from the option market. Managerial learning from the option market is beneficial to firms by improving investment efficiency. Cross-sectional variation in real effects aligns with predictions based on investment irreversibility, executive incentives, and industry competition. The results are robust to alternative explanations.

Suggested Citation

Shang, Botong, Real Effects in the Option Market (October 12, 2020). Available at SSRN: or

Botong Shang (Contact Author)

University of Rochester - Simon Business School ( email )

Rochester, NY
United States

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