Enhancement in a firm's information environment via options trading and the efficiency of corporate investment

Anagnostopoulou, Seraina C.; Trigeorgis, Lenos; Tsekrekos, Andrianos E.

Abstract

We examine the association between enhancement in a firm's information environment via options trading and firm investment efficiency. Investment inefficiency is partly driven by information asymmetries between firm managers and capital providers, aggravating moral hazard concerns. We test whether enhancement in a firm's information environment through higher volumes of options trading (including a natural experiment involving exogenous shocks via the Penny Pilot Program) is positively related to more efficient firm investment decisions. Our results confirm that enhanced informational efficiency via higher volumes of options trading is positively related to improvements in firm-level investment efficiency. Our findings are in line with the enhancement in the information environment stemming from options trading reducing agency and moral hazard concerns (an agency channel) and are not driven by alternative explanations such as managerial learning from informed traders or a lower cost of capital. Overall, our findings suggest that an enhanced information environment via more options trading benefits firms’ investment decisions.

Citation

Anagnostopoulou, S. C., Trigeorgis, L., & Tsekrekos, A. E. (2023). Enhancement in a firm's information environment via options trading and the efficiency of corporate investment. Journal of Banking and Finance, 149, Article 106809. https://doi.org/10.1016/j.jbankfin.2023.106809

• Journal Article Type: Article
• Acceptance Date: Feb 10, 2023
• Online Publication Date: Feb 15, 2023
• Publication Date: 2023-04
• Deposit Date: Oct 17, 2023
• Publicly Available Date: Aug 16, 2024
• Journal: Journal of Banking & Finance
• Print ISSN: 0378-4266
• Publisher: Elsevier
• Peer Reviewed: Peer Reviewed
• Volume: 149
• Article Number: 106809
• DOI: https://doi.org/10.1016/j.jbankfin.2023.106809
• Public URL: https://durham-repository.worktribe.com/output/1804293