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Does options trading deter real activities manipulation?

Author

Listed:
  • Mahmoud Delshadi

    (University of Glasgow)

  • Mahmoud Hosseinniakani

    (Norwegian University of Science and Technology (NTNU))

  • Zabihollah Rezaee

    (The University of Memphis)

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.

Suggested Citation

  • Mahmoud Delshadi & Mahmoud Hosseinniakani & Zabihollah Rezaee, 2023. "Does options trading deter real activities manipulation?," Review of Quantitative Finance and Accounting, Springer, vol. 61(2), pages 673-699, August.
    • Handle: RePEc:kap:rqfnac:v:61:y:2023:i:2:d:10.1007_s11156-023-01162-3
    DOI: 10.1007/s11156-023-01162-3
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    More about this item

    Keywords

    Earnings management; Real activities manipulation; Options trading;
    All these keywords.

    JEL classification:

    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • M40 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - General

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