Does Options Trading Reduce the Demand for Conditional Accounting Conservatism?
53 Pages Posted: 22 Apr 2021
Date Written: April 20, 2021
We examine if options trading via organized markets reduces the demand for conditional conservatism by alleviating information asymmetry and by mitigating the shareholders-manager conflict. We build upon and extend prior evidence that options trading enhances stock market informational efficiency. Focusing on a large sample of firms from 1997 to 2019, we show that options trading is associated with less conditional conservatism in financial reporting. Moreover, firms reduce their level of conditional conservatism after being listed on the options market. Options trading’s impact on conditional conservatism is greater among small firms, firms with low asset tangibility, and firms with long investment cycles. We find that options trading has little or no effect when economic policy uncertainty is high. We observe that the presence of financial analysts strengthens the negative association between options trading and conditional conservatism. We also document that options trading prominently influences conditional conservatism when investor sentiment is high.
Keywords: conditional conservatism, options trading, information asymmetry
JEL Classification: G14, M41
Suggested Citation: Suggested Citation