Quint

Research Question:#

Effect of Option Listing on Corporate Investment

• Mediated by industry

Theory:

• Intuition: You think you know more about the stock than the market. Hence, availability of options allows you to leverage that knowledge . Secondly, you can manage your risk more precisely. Therefore, more investors.

• Firstly, the introduction of options leads an increase in investors that are willing to invest in the underlying stock as they are able to execute different investment strategies.

  • Trading with options: More leverage -> investors have incentive to find more information

  Why is this the case?

  Option listing -> More investors -> Less asymmetric information -> Lower return on equity -> More investments

  More demand for information -> Less asymmetric information

  • Increased attention to company’s announcements/claims
  • Better financial reporting quality
  • Beter corporate governance
  • Increased no. of analysists

  This is a quite far-fetched link. Are there theoretical models that have easier to understand channels? Can you support this by a proposition in a theoretical paper?

• In general, it seems you have looked well at the empirical literature/proof for your proposed causal chain, but the theory is less clear. That is something you need to work on!

Contribution:

• You are basically asking whether options increase efficiency (create value!). You can mention this in your contribution.
• You might argue that options have a “bad reputation”, associated with speculation. You can show whether they actually create value by decreasing asymmetric information.
• What is the measure in the literature used as a proxy for asymmetric information? (In the next draft, you need to answer this question very clearly)
• I think it would be cool to conduct this research with European data. (USA data already overused)
  • Have you tried contacting Euronext and explain them your research idea?
  • (If it’s not possible, it’s not possible, and you can resort to US data)

Methodology:

• I disagree with the (preliminary) methodology you sketched out: I think you have show each element of the causal chain I put in quotes above. Especially the More investors -> More demand for information -> Less asymmetric information -> Lower return on equity part might be challenging. Do you have any suggestions/ideas on how to do this?
  • Eliminate some chains
  • My suggestion(s) (but not informed by the literature!):
    • Business press coverage
    • More analysists covering
    • More accurate financial reporting
    • Better forecasts
  • Event study vs. more long-term effect
• Conclusion:
  • The research design is interesting, and feasible, and you have thought about various strategies in case of non-availability of data. However, you do need to work on the justification & relevance, and the research as it is requires more thinking about the precise methodology.
    • Criticise the available (empirical) literature