How Does Information Quality Affect Option and Stock Returns?
Matthew R. Lyle
Kellogg School of Management
May 15, 2014
Prior research documents that firms with low information quality do not, on average, earn high future stock returns. These findings are often considered puzzling because low information quality is commonly argued to be a source of priced risk that is expected to raise future stock returns. Using a large sample of options data I find that firms with low-quality information have future call option returns that are significantly lower than firms with high information quality. Like call options, firms with equity that is most "option-like" and have low-quality information have significantly lower future stock returns than firms with high-quality information and equity that is least "option-like." If this "option-like" effect is not controlled for in empirical tests then there is often no association between future stock returns and information quality. Taken together, my results suggest that information quality has a strong association with future option and stock returns, but the association with stock returns is dependent on how "option-like" the firm's equity is.
Number of Pages in PDF File: 55
Keywords: Information Quality, Option Returns, Stock Returns
JEL Classification: G10, G11, G14, M41
Date posted: May 16, 2014
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