Options Trading Activities and Corporate Cash Holdings

Posted: 15 Jan 2020 Last revised: 15 Apr 2020

See all articles by Douglas O. Cook

Douglas O. Cook

University of Alabama - Culverhouse College of Commerce & Business Administration

Scott Luo

University of Alabama - Department of Economics, Finance and Legal Studies

Date Written: December 26, 2019

Abstract

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

Cook, Douglas O. and Luo, Scott, Options Trading Activities and Corporate Cash Holdings (December 26, 2019). Available at SSRN: https://ssrn.com/abstract=3509922 or http://dx.doi.org/10.2139/ssrn.3509922

Douglas O. Cook

University of Alabama - Culverhouse College of Commerce & Business Administration ( email )

Culverhouse College of Business
Tuscaloosa, AL 35487-0223
United States
205-348-8971 (Phone)
205-348-0590 (Fax)

Scott Luo (Contact Author)

University of Alabama - Department of Economics, Finance and Legal Studies ( email )

P.O. Box 870244
Tuscaloosa, AL 35487
United States

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