Does Options Trading Deter Real Activities Manipulation?

46 Pages Posted: 1 Sep 2021 Last revised: 10 Apr 2023

See all articles by Mahmoud Delshadi

Mahmoud Delshadi

Adam Smith Business School - University of Glasgow

Mahmoud Hosseinniakani

Norwegian University of Science and Technology (NTNU) - NTNU Business School

Zabihollah Rezaee

University of Memphis - School of Accountancy

Date Written: August 29, 2021

Abstract

We examine whether and how options trading activity curtails real activities manipulation. Using a large sample of US firms that are suspected of earnings manipulation, we document that an active options trading market significantly reduces real activities manipulation. We confirm our findings by using 2SLS analyses and alternative research designs. Our findings are also robust to using alternative proxies for options trading activity. Further, we find that the deterring impact of options trading on real activities manipulation is more pronounced among firms with low institutional ownership, firms in highly competitive industries, and small and young firms. Overall, our findings show that an active options market discourages managers from engaging in real activities manipulation as informed options trading helps stock prices better reflect adverse consequences of real activities manipulation. Our findings highlight the benefits of the options market development in reducing value-destroying activities and thus provide policy, practice, and research implications.

Keywords: Earnings management, Real activities manipulations, Options trading

JEL Classification: G14, G12, G30, M41

Suggested Citation

Delshadi, Mahmoud and Hosseinniakani, Mahmoud and Rezaee, Zabihollah, Does Options Trading Deter Real Activities Manipulation? (August 29, 2021). Available at SSRN: https://ssrn.com/abstract=3913726 or http://dx.doi.org/10.2139/ssrn.3913726

Mahmoud Delshadi (Contact Author)

Adam Smith Business School - University of Glasgow ( email )

Glasgow, Scotland G12 8QQ
United Kingdom

Mahmoud Hosseinniakani

Norwegian University of Science and Technology (NTNU) - NTNU Business School ( email )

Norway

HOME PAGE: http://https://www.ntnu.edu/employees/mahmoud.hosseinniakani

Zabihollah Rezaee

University of Memphis - School of Accountancy ( email )

Fogelman College of Business and Economics
Memphis, TN 38152-6460
United States
901-678-4652 (Phone)

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