Option Listings, Stock Price Informativeness and Investment Decisions

Abstract

We show that a common financial innovation-stock option listings-enhances the ability of firm managers to extract valuable information from market prices, which they then use in their investment decisions. We structure our empirical analysis around a stylized learning model, providing a motivating framework. We show that the investment-to-price sensitivity increases significantly in the years after the stock option listing date. Moreover, the increase in investment-toprice sensitivity is more pronounced when the new stock options are successfully adopted by investors, as this leads to greater informational improvements. Our results suggest strong links between financial innovations and real economic decisions.

Keywords: Financial innovation, stock option listing, investment-to-price sensitivity, market information, economic growth

JEL Classification: G13, G14, G31, O31, O39