Another Look at Option Listing Effects
Stewart Mayhew, Purdue University
Vassil Mihov, Purdue University

Prior research shows that introduction of options affects the volatility, liquidity, price and other characteristics of the underlying stock. These results, however, do not adequately account for the fact that option listing is endogenous, a result of decisions made by exchanges and regulators. In this paper, the authors investigate factors affecting exchanges listing decisions by comparing the characteristics of stocks selected for option listing to other stocks that were eligible but not listed. Firm size, volume, and volatility are positively related to the probability of listing, but their relative contributions have changed significantly over time. The authors use these results to construct various matched samples to re-examine some option listing effects reported in the literature using control-­sample methods. Contrary to previous results, they find that in recent subperiods, volatility increases with option listing, consistent with the hypothesis that forward-looking exchanges list options in anticipation of increasing volatility. (Accepted Fall 1999.)