From Financial Innovation to Brand Innovation: How Options Trading Affects Trademark Activities

This study examines the impact of financial innovation, measured by option listing and trading, on firms’ brand innovation using the U.S. trademark database. We find that higher option volume not only increases brand innovation measured by newly-launched trademarks, but also increases the failure rate of these trademarks. These results are supported by difference-in-differences regressions based on the initiation of option trading, using control stocks with similar propensities of option listing, and a quasi-natural experiment by comparing stocks on the margin of the minimum price requirement of option listing. We further show that trademarks that will (not) survive over the long run are associated with higher (lower) operating performance and stock returns. The negative effect of option volume on trademark survival rate is more pronounced for firms with more entrenched management. These findings are explained by managers’ risk-taking due to available options for hedging, rather than improved price efficiency. Moreover, as reflected by higher trademark diversity, firms tend to launch risky new brands in new and different areas in response to active option trading. Overall, our evidence indicates that trading activities in the derivatives market are a key determinant of brand innovation.