TY - JOUR TI - Option prices and accounting choices DO - https://doi.org/doi:10.7282/T3ZG6TWG PY - 2014 AB - My dissertation research contains two chapters on the impact of the accounting choices, conservatism and quality of the accounting information, on the option prices. In the first chapter entitled "Option Prices, Accruals and Conservatism" we examine whether option traders incorporate two key characteristics of financial reporting choices, namely, accrual quality and conservatism, in pricing options. Since the accounting methods chosen for reporting accruals, and the depth of conservatism in recognizing good or bad news, drive reported financial numbers and stock prices, it is reasonable to expect that option prices, and the implied volatility embedded in these prices, are also influenced by these accounting choices. With respect to accrual quality, we conjecture that the higher the accrual quality, the better the quality of information reported, the lower the uncertainty, and the lower the implied volatility. Therefore, we expect an inverse relation between accrual quality and implied volatility. On conservatism, we argue that higher conservatism increases uncertainty because it provides an incomplete (biased) one-sided negatively biased report, while mostly understating or even ignoring positive news. Using different metrics for both accrual quality and conservatism, we find compelling evidence in support of our conjectures. In the second chapter entitled "Option Volatility Skew, Accruals, and Conservatism", we investigate whether the option volatility skew is influenced by the accounting choices. We reason that if uncertainty about the firm is reduced, it should reduce the option volatility skew. Since higher (lower) accruals quality presumably lowers (increases) uncertainty about the firm, volatility skews should decrease (increase). With respect to conservatism, the implications are not clear cut. It has been argued that conservatism in financial reporting increases the uncertainty about the firm (Langberg and Sirivaramakrishnan, 2008), while others have argued that uncertainty is reduced (Guay and Verrechia, 2007; Suijs, 2008; Garcia et al., 2011). We find that as the level of conservatism increases and the quality on accruals decreases, the option volatility skew increases. KW - Management KW - Options (Finance)--Prices KW - Accounting--Methods LA - eng ER -