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Seminar by Professor Cameron Truong

Research Seminars - business and economics
  • Topic: Options Trading and the Cost of Equity Capital
  • Speaker: Professor Cameron Truong - Monash University
  • Venue:
  • When: 27th April, 2012, (Fri)
  • Time:

Abstract

This study examines the informational role that options listings and options trading volume play in determining the rate of return expected by investors, i.e., the implied cost of equity capital. We conduct a multitude of analyses based on three separate implied cost of equity capital proxies and an average-based proxy. Our cross-sectional analysis suggests that firms with listed options have lower implied cost of equity capital than firms without listed options, while the results from our temporal difference-in-differences analysis suggest that firms with listed options experience a significant decrease in their implied cost of equity capital relative to a matched sample of firms without listed options following an options listing. Moreover, we find that, within firms that have listed options, firms with higher options trading volume are associated with lower implied cost of equity capital. These findings, which are robust to a wide range of additional tests, are consistent with the view that options trading plays an important role in the equity market by improving the precision of information and reducing information asymmetry problems, resulting in lower expected return on equity.



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