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

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  • 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.

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  • Anagnostopoulou, Seraina C. & Trigeorgis, Lenos & Tsekrekos, Andrianos E., 2023. "Enhancement in a firm's information environment via options trading and the efficiency of corporate investment," Journal of Banking & Finance, Elsevier, vol. 149(C).
    • Handle: RePEc:eee:jbfina:v:149:y:2023:i:c:s0378426623000341
    DOI: 10.1016/j.jbankfin.2023.106809
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    More about this item

    Keywords

    Information environment enhancement; Option trading activity; Corporate investment efficiency; Under- or over-investment; Information asymmetry; Agency costs; Managerial learning;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty

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