Why do investment banks buy put options from companies?

Stanley B. Gyoshev, Todd R. Kaplan, Samuel H. Szewczyk, George P. Tsetsekos

Research output: Contribution to journalArticlepeer-review


Companies have collected billions in premiums from privately sold put options written on their own stock. It is puzzling that counterparties, investment banks, would agree to make such transactions with better-informed companies which have extraordinary ability to time the market as documented by Jenter et al. (2011). To resolve this puzzle, we develop a model that shows that investment banks, by offering to buy put options from better-informed parties, receive private information about issuing companies. Our model also incorporates the practice of firms (such as Microsoft) of sometimes repurchasing their own put options and thus providing additional private information to investment banks. Empirically, we find support for our theory from an abnormal 9% increase in the stock prices and a 40% increase in the trading volumes around the put sales. Examination of 13D filings reveals that trading by upper management insiders cannot completely account for the change in volume.

Original languageEnglish
Article number101718
JournalJournal of Corporate Finance
StatePublished - Apr 2021

Bibliographical note

Publisher Copyright:
© 2020


  • Information acquisition
  • Put options
  • Screening
  • Separating equilibrium
  • Strategic trading

ASJC Scopus subject areas

  • Business and International Management
  • Finance
  • Economics and Econometrics
  • Strategy and Management


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