We examine the information content of option and equity volumes when trade direction is unobserved. In a multimarket symmetric information model, we show that equity short-sale costs result in a negative relation between relative option volume and future ﬁrm value. In our empirical tests, ﬁrms in the lowest decile of the option to stock volume ratio (O/S) outperform the highest decile by 1.47% per month on a risk-adjusted basis. Our model and empirics both indicate that O/S is a stronger signal when short-sale costs are high or option leverage is low. O/S also predicts future ﬁrm-speciﬁc earnings news, consistent with O/S reﬂecting private information.
Keywords: Options, Volume, Microstructure, Short Sale Costs
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