This study analyzes the impact of information quality on option returns. I find that firms with low-quality information have call option returns that are significantly lower than firms with high information quality. The findings hold in- and out-of-sample, over different time periods, and are robust to a battery of asset pricing tests. The results suggest that the risk caused by poor information quality has a powerful and non-diversifiable impact on the expected returns of option contracts. Further analysis shows that these results are important when examining the cross-sectional link between stock returns and information quality. Firms with low information quality and equity that is "option-like" have significantly lower future stock returns than firms with high information quality. If this option-like effect is not controlled for in empirical tests, the association between information quality and the cross-section of stock returns is often flat. This is especially true for accounting-based proxies of information quality.
| Identifer | oai:union.ndltd.org:TORONTO/oai:tspace.library.utoronto.ca:1807/44149 |
| Date | 03 April 2014 |
| Creators | Lyle, Matthew |
| Contributors | Callen, Jeffrey |
| Source Sets | University of Toronto |
| Language | en_ca |
| Detected Language | English |
| Type | Thesis |
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