Early studies find that option introductions tend to raise the price of underlying stocks. More recent research indicates that post-1980 option introductions are associated with negative abnormal returns in underlying stocks. Other studies document increased short sale activities following option listing. This paper provides evidence that the documented abnormal returns and changes in short interest around option listings are consistent with the mitigation of short sale constraints resulting from the option introduction, and that both the abnormal returns and short interest changes around listing dates can be predicted using ex ante characteristics of the underlying stock.

Miller (1977) hypothesizes that dispersion of investor opinion in the presence of short-sale constraints leads to stock price overvaluation. However, previous empirical tests of Miller's hypothesis examine the valuation effects of only one of these two necessary conditions. We examine the valuation effects of the interaction between differences of opinion and shortsale constraints. We find robust evidence of significant overvaluation for stocks that are subject to both conditions simultaneously. Stocks are not systematically overvalued when either one of these two conditions is not met.

Prior research concludes that option introductions improve the average liquidity of the underlying stocks. We develop an improved, generalizable test to assess whether market quality changes occur on or near an event date. Applying this method to option listing events, we conclude that options do not systematically improve the market quality of the underlying security; rather, the market quality of the underlying security improves before the listing decision. Hazard model tests indicate that improving liquidity is a selection criterion in the option listing decision. Moreover, these tests suggest that the size of a stock's bid-ask spread is the single most important option listing determinant.

We theoretically and empirically investigate the role of information on the cross section of stock returns and firms' cost of capital when investors face estimation risk and learn from noisy signals of uncertain quality. The resultant equilibrium is an information-dependent conditional CAPM. We find strong empirical support for the model. Innovations in market volatility, oil prices, exchange rates, and dispersion of analysts' forecasts not only help explain the cross section of stock returns, but their influence depends on the stock's systematic estimation risk. Moreover, dividend and share repurchase initiations have significant downward announcement effects on estimated betas and their standard errors.