The Impact of Options Trading on the Relationship between Research Quotient and Firm Performance

Abstract

The performance of innovation could be counted by the number of patent. Patent information enables a firm to estimate R&D efficiency and stock market value. Nonetheless, patents is not universal because more than 50% companies in COMPUSTAT do not patent their new products. Since patents have some drawbacks, Cooper, Knott, and Yang (2015) use Research Quotient (RQ) as an indicator of firm innovation because RQ measures the productivity of the R&D department, which produces a new innovative product and transforms it into revenues. In this paper, we examine the impact of option trading on the relation between RQ and stock market return (or firm value). We find that RQ has the positive impact on firm value, proxy by market-to-book (MTB) value. The option dummy, which is the firm with option trading, has significantly positive impact on the relation between RQ and firm value and insignificantly positive impact on the relation between RQ and future stock return. Nonetheless, interaction term of RQ and option volume has positive and significant impacts on MTB and future stock return.