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Short Sales and Option Listing Decisions

Authors

  • Benjamin M. Blau,

  • Tyler J. Brough

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    • Benjamin M. Blau is an Associate Professor and Tyler J. Brough is an Assistant Professor in the Department of Economics and Finance at the Jon M. Huntsman School of Business, Utah State University, Logan, UT.


  • The authors gratefully acknowledge helpful comments from Frank Caliendo, Drew Dahl, Jared Delisle, Chantell Hall, Kathleen Fuller, Grant McQueen, Mike Pinegar, Jason Smith, Bonnie Van Ness, Robert Van Ness, Mark Van Boening, Ryan Whitby, and seminar participants at Brigham Young University, the University of Mississippi, Utah State University, and the 2011 Financial Management Association Meeting in Denver, Colorado. We also recognize and are thankful for the insightful suggestions from an anonymous referee and Marc Lipson (Editor).

Abstract

We find that stocks with higher levels of prelisting short activity have a greater probability of option listing. These results are driven by the prelisting short activity of market makers, which suggests that exchanges believe that stocks with greater short selling will provide option market makers a better opportunity to hedge with short sales in the spot market. We also confirm that after options are listed, stocks with more prelisting short activity have more option trading activity. These results indicate that option exchanges strategically list options for stocks they believe with generate high trading volume thereby maximizing the profits of exchange members.

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