The Bright Side of Financial Derivatives: Options Trading and Firm Innovation

Iván Blanco and David Wehrheim

MPRA Paper from University Library of Munich, Germany

Abstract: Do financial derivatives enhance or impede innovation? We aim to answer this question by examining the relationship between equity options markets and standard measures of firm innovation. Our baseline results show that firms with more options trading activity generate more patents and patent citations per dollar of R&D invested. We then investigate how more active options markets affect firms' innovation strategy. Our results suggest that firms with greater trading activity pursue a more creative, diverse and risky innovation strategy. We discuss potential underlying mechanisms and show that options appear to mitigate managerial career concerns that would induce managers to take actions that boost short-term performance measures. Finally, using several econometric specifications that try to account for the potential endogeneity of options trading, we argue that the positive effect of options trading on firm innovation is causal.

Keywords: innovation; R&D productivity; options market; stock price efficiency; career concerns (search for similar items in EconPapers)
JEL-codes: D81 G12 G14 G30 G38 O31 O32 (search for similar items in EconPapers)
Date: 2016-02-04
New Economics Papers: this item is included in nep-bec, nep-cfn, nep-cse and nep-sbm
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (4)

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https://mpra.ub.uni-muenchen.de/69239/1/MPRA_paper_69239.pdf original version (application/pdf)
https://mpra.ub.uni-muenchen.de/69360/1/MPRA_paper_69239.pdf revised version (application/pdf)

Related works:
Journal Article: The bright side of financial derivatives: Options trading and firm innovation (2017)
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Persistent link: https://EconPapers.repec.org/RePEc:pra:mprapa:69239

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