Does options trading reduce the demand for conditional accounting conservatism?

‬‬‬‬‬‬‬‬‬‬‬‬‬‬‬‬‬‬‬‬‬‬‬‬‬‬‬‬‬‬‬‬‬‬‬‬‬‬‬‬‬‬‬‬‬‬‬‬‬‬‬‬‬‬‬‬‬‬‬‬‬‬‬‬‬‬‬‬‬‬‬‬‬‬‬‬‬‬‬‬Abstract We examine if options trading via organized markets reduces conditional conservatism by alleviating information asymmetry. We build upon and extend prior evidence that options trading enhances stock market informational efficiency. Focusing on a large sample of firms from 1997 to 2019, we show that options trading volume is a determinant of the demand for conditional conservatism, as it is associated with less conditional conservatism in financial reporting. Moreover, firms reduce their level of conditional conservatism after being listed on the options market and upon entering the Penny Pilot Program. Options trading’s effect on conditional conservatism is greater among small firms, firms with low asset tangibility, firms with long investment cycles and firms with higher external financing needs. We also document that options trading prominently influences conditional conservatism when investor sentiment is high.