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1、Options Trading Activity and Firm Valuation Richard Roll, Eduardo Schwartz, and Avanidhar Subrahmanyam UCLA The IssuenRoss (1976) - options can improve market efficiency by expanding contingencies covered by traded securities (they help to complete the market). Allocational efficiency.nAlso, since i
2、nformed traders may prefer to trade options rather than stock (more leverage), options may allow agents to trade more effectively on their information, thus improving informational efficiency. The Issue, contd.nCao and Wei (2007) find that informational asymmetries play a more dominant role in influ
3、encing options liquidity (relative to stocks).nEasley, OHara and Srinivas (1998), Chakravarty, Gulen, and Mayhew (2004) find that options order flows contain information about future direction of the underlying stock price.The Issue, contd.nIf prices reveal more information, then resources are alloc
4、ated more efficiently, which translates to higher firm valuations. nIn addition, greater informational efficiency could reduce investment risk because market prices reflect information more precisely. nThese arguments suggest that firms with higher options trading volume should be more informational
5、ly efficient and thus valued more highly. A point of clarificationnThe mere listing of an option does not necessarily imply a valuation benefit. nIf the options market has insufficient volume, the valuation benefit from listing would be minor because informed traders see no advantage to trading in o
6、ptions (Admati and Pfleiderer, 1988). nAny valuation benefit of options listing should depend on the amount of trading activity. nTo the best of our knowledge, the relation between options trading activity and firm valuation has not been examined previously. The AnalysisnWe analyze the effect of opt
7、ions trading volume on firm value after controlling for other variables that may also affect firm value such as firm size, share turnover, return on assets, capital expenditures, leverage and dividend payments. n Following other studies we use a measure of Tobins q as the valuation metric. Findingsn
8、We find strong evidence that firms with more options trading volume have higher value. nFirms with more options trading activity in a given period tend to have improved financial performance in the next period.n This is consistent with the premise that options trading, by enhancing information flows
9、, may lead to better corporate resource allocation. Findings, contd.nThe results also show that the effect of options trading on firm valuation is greater in stocks with low analyst following. nThis indicates that the impact of options trading on information production is larger in stocks where inve
10、stment analysis produces comparatively less public information.DatanOptions trading data from Option Metrics 1996 to 2005: 10 years of daily data (we aggregate to total annual options volume for each stock).nMatched with data from Compustat on Tobins q and a set of control variables.nTobins q is com
11、puted as the sum of the market capitalization of the firms common equity, the liquidation value of its preferred stock, and the book value of its debt divided by the book value of the firms assets (total firm q). All results go through if we use M/B of equity instead of q. Control variablesnA proxy
12、for the firms leverage, long-term debt to total assets, is intended to measure the likelihood of distress, LTD. We expect higher LTD, lower q.nProfitability, ROA, intended to capture the notion that more profitable firms may have more favorable investment opportunities. On the other hand, high ROA m
13、ay also mean that the firm is in a mature phase, and has limited growth opportunities. The relation between ROA and q is an empirical issue. nShare turnover in the underlying stock: liquidity effects arising from stock trading activity as opposed to options activity.Controls, contd.nA direct measure
14、 of investment opportunities is capital expenditures divided by sales (CapX) high values should mean greater q. nA dummy variable for whether the firm pays a dividend proxies for capital constraints (firms that pay dividends may have more free cash flow, which may potentially be used to overinvest i
15、n marginal projects). nFirm size (market value of firms shares).Number of firms with nonmissing dataYearAll firmsPositive options volume 199663661342 199764301575 199861571717 199958741686 200056331638 200151501503 200248831597 200346531565 200446031705 200540641655Natural bifurcation of sampleSumma
16、ry StatsAll FirmsPositive Options VolumeVariableMeanMedianStandard Deviation Tobins q1.9151.1513.364 Options volume1877023434Size 2.1971.88512.61 Share turnover1.5330.9492.636ROA-0.0630.0260.553 CapX0.5660.04025.02 LTD0.1830.1140.269 DivDum0.31900.466VariableMeanMedianStandard DeviationTobins q2.2501.4502.929 Options volume648739443223Size 5.2391.02519.92 Share Turnover2.2411.6012.468ROA-0.
