Do options trading activities affect underlying firms' asymmetric cost behavior?

Mohammad Hendijani Zadeh and Zahra Jalali

Journal of Corporate Finance, 2024, vol. 88, issue C

Abstract: We investigate whether options trading activities affect underlying firms' degree of cost stickiness. Using a panel of US companies, we find that options trading activities reduce the underlying firms' level of cost stickiness. Our findings are robust to alternative proxies for options trading activities and cost stickiness, two-stage least-squares regression, and two quasi-natural experiments. Additional analyses indicate that the negative effect of options trading activities on cost stickiness is more pronounced for firms with higher availability of cash flows and lower corporate governance and audit quality. Finally, we implement a mediator analysis and show that higher options trading activities improve underlying firms' investment efficiency as they have more efficient corporate resource allocation via lower levels of cost stickiness. Overall, our results underscore the monitoring and governance role of options trading activities in enhancing underlying firms' information environment and limiting their insiders' opportunistic behaviors, resulting in fewer corporate resource misallocation activities via reduced degrees of cost stickiness.

Keywords: Cost stickiness; Cost behavior; Options trading activities; Informational efficiency; Information asymmetry (search for similar items in EconPapers)
JEL-codes: G12 G23 M41 (search for similar items in EconPapers)
Date: 2024
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Persistent link: https://EconPapers.repec.org/RePEc:eee:corfin:v:88:y:2024:i:c:s0929119924001196

DOI: 10.1016/j.jcorpfin.2024.102657

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