Information Quality, Growth Options, and Stock Returns

The association between future stock returns and information quality depends on how option-like is the firm's equity. The more growth options held by the firm, the more option-like is the firm's equity. This study shows that 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 rational pricing, are predictable based on traditional asset pricing theory, and are robust to numerous specifications. These findings offer a theoretical-based and empirically-supported explanation for why some influential 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 stock returns.