Does options trading deter real activities manipulation?

Mahmoud Delshadi (), Mahmoud Hosseinniakani () and Zabihollah Rezaee ()
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Mahmoud Delshadi: University of Glasgow
Mahmoud Hosseinniakani: Norwegian University of Science and Technology (NTNU)
Zabihollah Rezaee: The University of Memphis

Review of Quantitative Finance and Accounting, 2023, vol. 61, issue 2, No 9, 673-699

Abstract: Abstract We examine whether and how options trading activity curtails real activities manipulation. Using a large sample of U.S. firms 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, among firms in highly competitive industries, and among 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 options market development in reducing value-destroying activities and thus provide policy, practice, and research implications.

Keywords: Earnings management; Real activities manipulation; Options trading (search for similar items in EconPapers)
JEL-codes: G32 M40 (search for similar items in EconPapers)
Date: 2023
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DOI: 10.1007/s11156-023-01162-3

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