Why Do Option Introductions Depress Stock Prices? An Empirical Study of Diminishing Short-Sale Constraints

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Abstract
Early studies find that option introductions tend to raise the price of underlying stocks. More recent research indicates 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 recently documented negative abnormal returns and increased short interest are consistent with the mitigation of short-sale constraints resulting from the option introduction. We further show that the stock price reaction and changes in short interest around options listing can be predicted using ex-ante characteristics of the underlying stock.

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