The Real Effects of Derivative Markets : The Impact of Options Trading Activity on Corporate Innovation

This study shows that firms with greater levels of options trading generate both more patents and patent citations. Interpreting these results, we argue that options markets enhance stock price efficiency, which, in turn, increases both managerial incentives and ability to innovate. Our split-sample results confirm these arguments. To alleviate endogeneity concerns, we exploit options listing as a plausible source of exogenous variation in options trading activity. We find that the number of both patents and patent citations increases after options listing for treatment firms relative to a sample of control firms with a similar listing propensity. Finally, we confirm the options listing findings by a quasi-natural experiment using options listing standards.