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Why Do Option Introductions Depress Stock Prices? A Study of Diminishing Short Sale Constraints

Published online by Cambridge University Press:  06 April 2009

Bartley R. Danielsen  and
Sorin M. Sorescu
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Abstract

Early studies find that option introductions tend to raise the price of underlying stocks. More recent research indicates that post-1980 option introductions are associated with negative abnormal returns in underlying stocks. Other studies document increased short sale activities following option listing. This paper provides evidence that the documented abnormal returns and changes in short interest around option listings are consistent with the mitigation of short sale constraints resulting from the option introduction, and that both the abnormal returns and short interest changes around listing dates can be predicted using ex ante characteristics of the underlying stock.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 36 , Issue 4 , December 2001 , pp. 451 - 484
Copyright
Copyright © School of Business Administration, University of Washington 2001

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