Why Did so Many Poor-Performing Firms Come to Market in the Late 1990s?: Nasdaq Listing Standards and the Bubble

This paper examines the impact of Nasdaq Listing Standards on the composition of new listings in the late 1990s. The Nasdaq has two types of listing standards: one based on profitability and the second based explicitly or implicitly on market capitalization. Specifically, unprofitable firms are allowed to list if either their pro-forma net tangible assets, which include the anticipated proceeds from their IPO, exceeds $18 million or their market capitalization exceeds$75 million. We show that as the market bubble accelerated in the late 1990s, a vast majority of firms entered under a market capitalization based standard, and these firms became a substantial portion of the Nasdaq. Subsequently, these firms performed the poorest both in terms of financial performance, stock return performance as well as involuntary delistings, while firms that listed under the profitability standard performed much better. In addition, firms that entered under market capitalization standards also exhibited the greatest return volatility. These results illustrate the importance of a profitability standard and the danger of a market capitalization based standard (explicit or implicit) in a market that is in, what ex-post turns out to be, a bubble

Stock Option Expense, Forward-Looking Information, and Implied Volatilities of Traded Options

Prior research generally finds that firms underreport option expense by managing assumptions underlying option valuation (e.g. they shorten the expected option lives), but it fails to document management of a key assumption, the one concerning expected stock-price volatility. Using a new methodology, we address two questions: (1) To what extent do companies follow the guidance in FAS 123 and use forward looking information in addition to the readily available historical volatility in estimating expected volatility? (2) What determines the cross-sectional variation in the reliance on forward looking information? We find that firms use both historical and forward-looking information in deriving expected volatility. We also find, however, that the reliance on forward-looking information is limited to situations where this reliance results in reduced expected volatility and thus smaller option expense. We interpret this finding as managers opportunistically use the discretion in estimating expected volatility afforded by FAS 123. In support of this interpretation, we also find that managerial incentives play a key role in this opportunism

Stock Option Expense, Forward-Looking Information, and Implied Volatilities of Traded Options

Prior research generally finds that firms underreport option expense by managing assumptions underlying option valuation (e.g. they shorten the expected option lives), but it fails to document management of a key assumption, the one concerning expected stock-price volatility. Using a new methodology, we address two questions: (1) To what extent do companies follow the guidance in FAS 123 and use forward looking information in addition to the readily available historical volatility in estimating expected volatility? (2) What determines the cross-sectional variation in the reliance on forward looking information? We find that firms use both historical and forward-looking information in deriving expected volatility. We also find, however, that the reliance on forward-looking information is limited to situations where this reliance results in reduced expected volatility and thus smaller option expense. We interpret this finding as managers opportunistically use the discretion in estimating expected volatility afforded by FAS 123. In support of this interpretation, we also find that managerial incentives play a key role in this opportunism