Information Quality, Growth Options, and Average Future Stock Returns
Posted: 8 Mar 2018 Last revised: 20 Mar 2018
Date Written: February 28, 2018
This study finds that the association between future stock returns and information quality depends on how option-like is the firm's equity. Firms that have more growth options are more option-like. The association between future stock returns and information quality is negative (positive) for those firms with equity that is least (most) option-like. These results are consistent with traditional asset pricing theory and are robust to numerous empirical specifications. Collectively, these findings offer a theoretically-based and empirically-supported explanation for why prior studies, that do not condition on the option-like nature of equity, have documented either a positive or no association between information quality and future average stock returns.
Keywords: Information Quality, Expected Returns, Stock Returns, Cost of Captial, Growth Options, Valuation
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