Does Options Trading Reduce the Demand for Conditional Accounting Conservatism?

53 Pages Posted: 22 Apr 2021

See all articles by Mahmoud Delshadi

Mahmoud Delshadi

Adam Smith Business School - University of Glasgow

Ahmad Hammami

John Molson School of Business, Concordia University

Michel Magnan

Concordia University - Department of Accountancy

Date Written: April 20, 2021

Abstract

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

Delshadi, Mahmoud and Hammami, Ahmad and Magnan, Michel, Does Options Trading Reduce the Demand for Conditional Accounting Conservatism? (April 20, 2021). Available at SSRN: https://ssrn.com/abstract=3831291 or http://dx.doi.org/10.2139/ssrn.3831291

Mahmoud Delshadi (Contact Author)

Adam Smith Business School - University of Glasgow ( email )

Glasgow, Scotland G12 8QQ
United Kingdom

Ahmad Hammami

John Molson School of Business, Concordia University ( email )

Montreal, Quebec H3G 1M8
Canada

Michel Magnan

Concordia University - Department of Accountancy ( email )

Montreal, Quebec H3G 1M8
Canada

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