The Effects of Option Introduction on Analyst Coverage and Earnings Estimates

Option introduction is associated with increased analyst coverage and a generally enhanced information environment for the underlying stocks. We hypothesize that these effects are more significant for Nasdaq than NYSE/Amex stocks because the Nasdaq stocks that are optioned tend to be smaller, traded less, and receive less analyst attention. Consistent with this, we document larger increases in analyst coverage, larger reductions in earnings forecast error, and more significant improvements in the timeliness of reaction to positive earnings announcements for Nasdaq stocks. We conclude that option introduction still has significant beneficial effects on stocks' trading and informational environment, even in a world where the great majority of large stocks have already been optioned.