Options Trading Activities and Corporate Cash Holdings
Posted: 15 Jan 2020 Last revised: 15 Apr 2020
Date Written: December 26, 2019
This paper examines the effects of options trading activities on corporate liquidity management. Based on a sample of 45,045 observations on U.S. non-financial firms from 1996 to 2016, we document a positive relationship between equity options trading intensity and corporate cash holdings. We address endogeneity concerns by using the instrumental variable approach, along with the CBOE's Penny Pilot Program as an exogenous shock. At the extensive margin, we find option listing to be associated with higher cash holdings, thus corroborating a causality interpretation of our baseline results. Studying the heterogeneous effects, we find the positive impact of options trading on cash reserves to be driven by firms where financial distress risk is high and debt-financed investments are constrained by liquidity issues. Moreover, options trading is positively associated with the cost of debt and marginal value of cash. Overall, these results suggest a precautionary saving motive due to active options markets that provide risk-shifting incentives to firms at the expense of outside creditors.
Keywords: Options trading, Cash holdings, Penny Pilot Program
JEL Classification: G12, G32
Suggested Citation: Suggested Citation