The Impacts of Retail Options Trading and REIT Director Backgrounds

Abstract

Chapter one investigates the pass through of option volume to stock pricing through option intermediary hedging. Increased liquidity in the options market creates price pressure in the underlying stock market through the hedging activity of intermediaries. When public option demand is imbalanced, liquidity providers have inventory imbalance and create predictable price action in the underlying through dynamic hedging. Using a simple proxy for public demand for options, I identify a strong and persistent relationship with synchronous and future stock returns in a manner predicted by net short delta hedgers' trades, distinct from information frictions. This phenomenon is most likely due to retail investors hoarding on specific options.

In chapter two, I document predictability in the cross-section of delta-hedged equity options as a function of Robinhood user holdings. Returns to writing delta-neutral calls to retail traders are highly statistically and economically significant. Returns are robust to several controls, factor risk adjustment, and momentum. Returns originate from retail demand-driven option mispricing and subsequent overpayment for relative exposure to underlying stock volatility. Returns are more substantial in periods of high retail sentiment or concentration.

Chapter three investigates the effect of director characteristics on firm performance. Using REITs as a laboratory to isolate the advisory role of the board of directors, we determine that directors with executive/governance experience in finance and accounting create significant value. Adding “high-value” directors is associated with an increase in monthly returns of between 1.1% and 2%, along with a 50-basis point increase in risk-adjusted return. CARs indicate that high-value directors are added to underperforming REITs, and results hold when controlling for endogeneity. High-value board members increase capital use efficiency, sell underperforming properties, and focus future investments on outperforming submarkets, while having higher pay-to-performance sensitivity and shorter tenure than average directors.