Abstract - Options Trading Activity and Firm Valuation

We study the relation between options trading volume and the value of the underlying firm. Options may have an effect on firm value because they help complete markets (thus contributing to allocational efficiency) and stimulate informed trades (thereby enhancing informational efficiency). However, these benefits are likely to manifest themselves in active, rather than inactive, options markets. Supporting this observation, we find that firms with more options trading have higher values of Tobin’s q, after accounting for other determinants of value. This finding holds for all sample firms and for the subset of firms with positive options volume. Corporate investment in firms with greater options trading is more sensitive to stock prices. We also find that the effect of options trading on firm valuation is stronger in stocks where the role of private information is likely to be greater. These results indicate that options trading activity is positively associated with firm values as well as information production.

Eduardo Schwartz
21.Apr 2009

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