This paper examines how option trading affects a firm’s equity financing decisions. We find that option trading increases both the total amount of capital that a firm raises in the equity market and the likelihood that a firm issues equity publicly, as opposed to privately. The
effects of option trading become stronger during bad economic times, when a firm’s equity financing is more restricted. These findings are consistent with the notion that the availability of option contracts increases investors’ demand for the underlying stock, thereby improving the accessibility of a firm to equity capital.
