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Informed traders may prefer the options market to the stock market for reasons including the leverage effect, transaction costs, restrictions on short sale. Many studies try to predict future returns of stocks using informed traders' behavior in the options market. In this study, we examine whether the trading volume ratios of single stock options have the predictive power for future returns of the underlying stock. By analyzing the stock price responses to the “preliminary announcement of performance” of 36 underlying stocks on the Korea Exchange from November 2014 to March 2021 and the trading volume of options written on those stocks, we investigate the relation between the option ratios, which are the call option volume to put option volume ratio (C/P ratio) and the option volume to stock volume ratio (O/S ratio), and the future returns of the underlying stock. We also examine which ratio is better in predicting the future returns. The authors found that both option ratios showed the statistically significant predictability about future returns of the underlying stock and that the return predictability of the O/S ratio is more robust than that of the C/P ratio. This study shows that indicators generated in the options market can be used to predict future underlying stock returns. Further, the findings of this study contributed to a dearth of literature pertaining to single stock options. The results suggest that the single stock options market is efficient and influences the price discovery in the stock market.

The purpose of this paper is to examine whether the underlying option impacts an insider’s propensity to purchase and sell before corporate announcements, the proportion of insiders’ trading after announcements relative to before announcements, and the insider’s profitability around corporate announcements.

The authors test whether the timing information and option have impacted on the tendency of insider trade, the percentage of all shares traded by insiders in the post-announcement to pre-announcement periods and the average cumulative abnormal stock returns during the pre-announcement period.

Insiders’ propensity to trade before announcements is higher for stocks without options listed than for stocks with traded options. This result is stronger for unscheduled announcements than for scheduled ones. The proportion of insiders’ trade volume after announcements relative to before announcements in stocks that have not options listed is higher than those in stocks with traded options. The positive relationship between the insiders’ signed volume and the informational content of corporate announcements is stronger in stocks without traded options than in stocks with options listed. Insider trades prior to unscheduled announcement are more profitable than those before scheduled ones.

The paper examines whether there is a difference between the effects of optioned stock and non-optioned stock. Roll et al. (2010) use the relative trading volume of options to stock ratio (O/S) to proxy for informed options trading activity. Future research could explore the impact of O/S. Moreover, the authors examine how insiders with private information use such information to trade in their own firms. Mehta et al. (2017) argue that insiders also use private information to facilitate trading (shadow trading) in linked firms, such as supply chain partners or competitors. Therefore, future research could consider the impact of shadow trading.

Since the insider’s propensity to buy before announcements in stocks without options listed is larger than in stocks with traded options and the relationship is stronger for unscheduled announcements than for scheduled ones, the efforts of regulators should focus on monitoring insider trading in stocks without options listed prior to unscheduled announcements.

First, Lei and Wang (2014) find that the increasing pattern of insider’s propensity to trade before unscheduled announcements is larger than that before scheduled announcements. The authors document the underlying option has impacted the insider’s propensity to purchase and sell, and the relationship is stronger for unscheduled announcements than for scheduled ones. Second, related studies show insider’s trading activity has shifted from periods before corporate announcements to periods after corporate announcements to decrease litigation risk. This paper find the underlying option has influenced the proportion of insiders’ trading after announcements relative to before announcements when the illegal insider trade-related penalties increase.

Using the next-day and next-week returns of stocks in the Korean market, we examine the association of option volume ratios – i.e. the option-to-stock (O/S) ratio, which is the total volume of put options and call options scaled by total underlying equity volume, and the put-call (P/C) ratio, which is the put volume scaled by total put and call volume – with future returns. We find that O/S ratios are positively related to future returns, but P/C ratios have no significant association with returns. We calculate individual, institutional, and foreign investors’ option ratios to determine which ratios are significantly related to future returns and find that, for all investors, higher O/S ratios predict higher future returns. The predictability of P/C depends on the investors: institutional and individual investors’ P/C ratios are not related to returns, but foreign P/C predicts negative next-day returns. For net-buying O/S ratios, institutional net-buying put-to-stock ratios consistently predict negative future returns. Institutions’ buying and selling put ratios also predict returns. In short, institutional put-to-share ratios predict future returns when we use various option ratios, but individual option ratios do not.

Sees the objective of teaching financial management to be to help managers and potential managers to make sensible investment and financing decisions. Acknowledges that financial theory teaches that investment and financing decisions should be based on cash flow and risk. Provides information on payback period; return on capital employed, earnings per share effect, working capital, profit planning, standard costing, financial statement planning and ratio analysis. Seeks to combine the practical rules of thumb of the traditionalists with the ideas of the financial theorists to form a balanced approach to practical financial management for MBA students, financial managers and undergraduates.

The flexibility of managers to respond to risk and uncertainty inherent in business decisions is clearly of value. This value has historically been recognized in an ad hoc manner in the absence of a methodology for more rigorous assessment of value. The application of real option methodology represents a more objective mechanism that allows managers to hedge against adverse effects and exploit upside potential. Of particular interest to managers in the merger and acquisition (M&A) process is the value of such flexibility related to the particular terms of a transaction. Typically, stock for stock transactions take more time to complete as compared to cash given the time lapse between announcement and completion. Over this period, if stock prices are volatile, stock for stock exchanges may result in adverse selection through the dilution of shareholder wealth of an acquiring firm or a target firm.

The paper develops a real option collar model that may be employed by managers to measure the market price risk involved to their shareholders in offering or accepting stock. We further discuss accounting issues related to this contingency pricing effect. Using an acquisition example from U.S. banking industry we illustrate how the collar arrangement may be used to hedge market price risk through flexibility to renegotiate the deal by exercising managerial options.

Recent studies suggested the ratio of option to stock volume reflected the private information. Informed traders were drawn to the options market for its leverage effect and relatively low transaction costs. Informed traders use different intervals of option moneyness to execute their strategies. The question is which types of option moneyness were traded by informed traders and what information was reflected in the market. In this study, the authors focused on this question and constructed a method for capturing the activity of informed traders in the options and stock markets.

The authors constructed the daily measure, moneyness option trading volume to stock trading volume ratio (MOS), to capture the activity of informed traders in the market. The authors formed quintile portfolios sorted with respect to the moneyness option to stock trading volume ratio and provided the capital asset pricing model and Fama–French five-factor alphas. To determine whether MOS had predictive ability on future stock returns after controlling for company characteristic effects, the authors formed double-sorted portfolios and performed Fama–Macbeth regressions.

The authors found that the firms in the lowest moneyness option trading volume to stock trading volume ratio for put quintile outperform the highest quintile by 0.698% per week (approximately 36% per year). The firms in the highest moneyness option trading volume to stock trading volume ratio for call quintile outperform the lowest quintile by 0.575% per week (approximately 30% per year).

The authors first propose the measures, moneyness option trading volume to stock trading volume ratio, that combined with the trading volume and option moneyness. The authors provide evidence that the measures have the predictive ability to the future stock returns.

In recent years, practitioners and academics have argued that traditional discounted cash flow (DCF) valuation models do not adequately capture the value of managerial flexibility to delay, grow, scale down or abandon projects. The insight is that a business investment opportunity can be conceptually compared to a financial option. The purpose of this paper is to develop a theoretical model based on option pricing theory to value managerial flexibility arising in stock for stock exchanges. The paper shows how a mergers and acquisition (M&A) deal may be optimally structured as a real options swap by including managerial flexibility of both the acquiring and target firms when stock prices are volatile. Using a recent acquisition case example from US banking industry the paper illustrates how the proposed exchange ratio swap optimize deal value and avoids earnings per share (EPS) dilution to both parties. Appropriate valuation of managerial flexibility is important given the historical premiums paid in takeovers. While the fact that such premiums exist lends some credibility to the idea that at least implicitly managerial flexibility is valued, the real options approach allows for more explicit valuation of such flexibility.

We investigate the impact of the creation of a new incentive structure for CEOs resulting from firms introducing equity-based compensation (EBC) as a means of paying top executives on policy decisions. Contrasting a firm’s stock and operating performance in the period the CEO is compensated with EBC (EBC period) and the period when EBC is not a component of the same executive’s pay (No EBC period) leads us to conclude that awarding stock options and restricted shares to executives is not associated with improved firm performance. However, firms initiate EBC after superior performance suggesting that CEOs are awarded compensation in this form as a reward for past performance. Firms have higher unsystematic and total risk levels in the EBC period suggesting EBC influences CEOs’ risk-taking behavior and reduces agency costs arising from managerial risk aversion. While there is no change in R&D expenses and cash ratios there is a decrease in capital expenditures in the EBC period, which is consistent with reduced overinvestment agency costs. Finally, leverage and payout ratios are similar in both periods implying that firms’ financing policy is not influenced by changes in CEOs’ compensation structure.

Reviews previous research on the timing of employee stock option exercise decisions and share price performance before and after insider trading. Analyses the 1992‐1993 exercise behaviour of top executives at 65 large US firms using the Black‐Scholes (1973) value (less anticipated dividends) as a benchmark to compare with the intrinsic value (market price minus exercise price) at the date of exercise. Finds options are exercised when the two values are roughly equal, i.e. that executives’ decisions are not risk‐averse or biased by private information. Also shows a tendency for the subsequent change in share prices to be lower when the intrinsic value is less than the Black‐Scholes value at the time of exercise. Considers consistency with other research and the implications of the findings.

This paper aims to examine the impact of the dividend payout ratio on future stock returns and momentum strategies.

The author uses the portfolio sorting approach used in the momentum literature to examine this impact.

First, the author shows that the returns for the winner stocks tend to be the largest if no dividends are paid and then decrease with the dividend payout ratio; the returns for the loser stocks tend to have an inverted U-shaped relationship with the dividend payout ratio, but the zero-dividend loser stocks have the smallest return; and the returns for the stocks between the winners and the losers tend to remain similar, regardless of the dividend payout ratio. Second, the author shows that momentum profit is the largest for the stocks that do not make dividend payment but appear similar for the stocks that pay dividends. The author's empirical findings imply that stock price momentum is a function of the dividend payout ratio, growth stock momentum tends to be much stronger than value stock momentum and no-dividend stock momentum beats dividend stock momentum. In fact, when the dividend payout ratio is considered, momentum profit can be improved by up to 63 per cent.

This paper is the first one to examine the impact of dividend payout ratios on future stock returns and momentum profit, and it obtained many interesting empirical results. In addition, unlike most studies in the momentum literature that use behavioral theory to explain empirical findings, this paper uses the growth option idea to present a rational explanation for the empirical results in this paper.