Question A:
Cboe is launching KPI binary options, which are exchange-listed, cash-settled option contracts whose payout is based on a specific company key performance indicator (KPI): https://www.cboe.com/kpi-binary-options-pipeline-hub/
The availability of exchange-traded derivatives on corporate accounting or operating performance metrics will measurably improve capital market efficiency by allowing investors to directly express views about individual components of business performance.
Responses
Responses weighted by each expert's confidence
Question B:
Binary options tied to individual companies' reported performance metrics will substantially increase incentives to manipulate reported results or influence the measurement of those metrics.
Responses
Responses weighted by each expert's confidence
Question A Participant Responses
| Participant | University | Vote | Confidence | Bio/Vote History |
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 Viral Acharya |
NYU Stern | Did Not Answer | Bio/Vote History | |
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 John Campbell |
Harvard | Bio/Vote History | ||
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Stock prices reflect expectations of many different components of a company's performance. The granular information revealed by KPI derivatives should provide valuable ingredients to help investors build expectations from the bottom up.
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 John Cochrane |
Hoover Institution Stanford | Bio/Vote History | ||
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"measurably" is hard. My guess is small improvement.
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 Douglas Diamond |
Chicago Booth | Bio/Vote History | ||
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 Wenxin Du |
HBS | Bio/Vote History | ||
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 Darrell Duffie |
Stanford | Bio/Vote History | ||
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Improved risk-management and better information from market-implied probability distributions.
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 Andrea Eisfeldt |
UCLA Anderson | Did Not Answer | Bio/Vote History | |
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 Eugene Fama |
Chicago Booth | Bio/Vote History | ||
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The improvement is likely to be marginal so "measurably" is the key term.
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 Xavier Gabaix |
Harvard | Bio/Vote History | ||
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 Itay Goldstein |
UPenn Wharton | Bio/Vote History | ||
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 John Graham |
Duke Fuqua | Did Not Answer | Bio/Vote History | |
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 Campbell R. Harvey |
Duke Fuqua | Bio/Vote History | ||
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Assuming people trade it, a more precise trading instrument can increase both information production and the incorporation of existing information into prices. Unclear whether this is enough to "measurably" impact whole market but it pushes in the right direction: efficiency.
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 Harrison Hong |
Columbia | Bio/Vote History | ||
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 Wei Jiang |
Emory Goizueta | Did Not Answer | Bio/Vote History | |
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 Steven Kaplan |
Chicago Booth | Bio/Vote History | ||
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 Anil Kashyap |
Chicago Booth | Bio/Vote History | ||
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 Arvind Krishnamurthy |
Stanford GSB | Did Not Answer | Bio/Vote History | |
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 Camelia Kuhnen |
UNC Kenan-Flagler | Bio/Vote History | ||
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 Michelle Lowry |
Drexel LeBow | Bio/Vote History | ||
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 Sydney Ludvigson |
NYU | Bio/Vote History | ||
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 Matteo Maggiori |
Stanford GSB | Bio/Vote History | ||
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 Loretta Mester |
UPenn Wharton | Bio/Vote History | ||
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While these contracts might be useful for hedging purposes in some specific instances, it is doubtful they will have a broader impact on market efficiency and the downsides including window dressing, potential insider trading, and gamification of finance seem more salient to me.
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 Tobias Moskowitz |
Yale School of Management | Bio/Vote History | ||
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 Tyler Muir |
UCLA Anderson | Did Not Answer | Bio/Vote History | |
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 Stefan Nagel |
Chicago Booth | Bio/Vote History | ||
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Allowing investors to express a view directly on these performance metrics rather than just on the stock price (which involves taking a view on the future views of other investors) will likely enhance information production.
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 Dimitris Papanikolaou |
Northwestern Kellogg | Bio/Vote History | ||
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 Jonathan Parker |
MIT Sloan | Bio/Vote History | ||
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This move is to compete with sports betting, for entertainment not hedging.
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 Christine Parlour |
Berkeley Haas | Did Not Answer | Bio/Vote History | |
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 Thomas Philippon |
NYU Stern | Bio/Vote History | ||
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 Manju Puri |
Duke Fuqua | Bio/Vote History | ||
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 Michael R. Roberts |
UPenn Wharton | Bio/Vote History | ||
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 Paola Sapienza |
Hoover Institution Stanford | Bio/Vote History | ||
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the efficiency effect is plausible but small, and hard to measure; it is a thin market (23 names) and for a large cap the incremental information is small,
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 Amit Seru |
Stanford GSB | Bio/Vote History | ||
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 Robert Stambaugh |
UPenn Wharton | Bio/Vote History | ||
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 Laura Starks |
UT Austin McCombs | Did Not Answer | Bio/Vote History | |
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 Jeremy Stein |
Harvard | Bio/Vote History | ||
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 Johannes Stroebel |
NYU Stern | Did Not Answer | Bio/Vote History | |
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 David Thesmar |
MIT Sloan | Bio/Vote History | ||
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 Sheridan Titman |
UT Austin McCombs | Bio/Vote History | ||
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 Stijn Van Nieuwerburgh |
Columbia Business School | Bio/Vote History | ||
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Easy to manipulate. Not clear we should be incentivizing management of a handful of kpis
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 Nancy Wallace |
Berkeley Haas | Bio/Vote History | ||
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Not clear that the informational and hedging benefits of KPI binary options outweigh the additional insider-trading, manipulation, and market-making risks, for the 23 firms that are the initial focus.
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 Toni Whited |
UMich Ross School | Bio/Vote History | ||
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 Haoxiang Zhu |
MIT Sloan | Bio/Vote History | ||
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Question B Participant Responses
| Participant | University | Vote | Confidence | Bio/Vote History |
|---|---|---|---|---|
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Viral Acharya |
NYU Stern | Did Not Answer | Bio/Vote History | |
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John Campbell |
Harvard | Bio/Vote History | ||
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Binary options create a discrete threshold at which manipulation of a KPI is particularly valuable. Continuous options do not have this problem.
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John Cochrane |
Hoover Institution Stanford | Bio/Vote History | ||
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Manipulating earnings to affect stock prices is not a big deal. Punishments for this sort of thing are pretty draconian. It's not like bets on George Santos showing up to Congress.
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Douglas Diamond |
Chicago Booth | Bio/Vote History | ||
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Wenxin Du |
HBS | Bio/Vote History | ||
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Darrell Duffie |
Stanford | Bio/Vote History | ||
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When the underlying variable is near a traded binary cutoff,. insiders will face moral hazard.
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Andrea Eisfeldt |
UCLA Anderson | Did Not Answer | Bio/Vote History | |
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Eugene Fama |
Chicago Booth | Bio/Vote History | ||
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Xavier Gabaix |
Harvard | Bio/Vote History | ||
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Itay Goldstein |
UPenn Wharton | Bio/Vote History | ||
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John Graham |
Duke Fuqua | Did Not Answer | Bio/Vote History | |
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Campbell R. Harvey |
Duke Fuqua | Bio/Vote History | ||
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Not "substantially" but it will increase incentives to manipulate. However, in my opinion, this cost is small compared to the efficiency gain (more information production and more information incorporated into prices).
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Harrison Hong |
Columbia | Bio/Vote History | ||
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Wei Jiang |
Emory Goizueta | Did Not Answer | Bio/Vote History | |
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Steven Kaplan |
Chicago Booth | Bio/Vote History | ||
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Anil Kashyap |
Chicago Booth | Bio/Vote History | ||
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lots of competing considerations, the incentives probably go up, but missing an earnings target is already a factor for firms, and the penalties for manipulating are important, so whether it will change behavior is much more important.
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Arvind Krishnamurthy |
Stanford GSB | Did Not Answer | Bio/Vote History | |
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Camelia Kuhnen |
UNC Kenan-Flagler | Bio/Vote History | ||
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Michelle Lowry |
Drexel LeBow | Bio/Vote History | ||
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Sydney Ludvigson |
NYU | Bio/Vote History | ||
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Matteo Maggiori |
Stanford GSB | Bio/Vote History | ||
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Loretta Mester |
UPenn Wharton | Bio/Vote History | ||
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Research studies have documented window dressing has occurred in the banking industry and I don't see why we should assume this won't happen here.
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Tobias Moskowitz |
Yale School of Management | Bio/Vote History | ||
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Tyler Muir |
UCLA Anderson | Did Not Answer | Bio/Vote History | |
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Stefan Nagel |
Chicago Booth | Bio/Vote History | ||
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Probably not as e.g. compensation was already partly tied to the performance metrics themselves. Introduction of these contracts does not really change incentives.
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Dimitris Papanikolaou |
Northwestern Kellogg | Bio/Vote History | ||
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Jonathan Parker |
MIT Sloan | Bio/Vote History | ||
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The effect should be small because of the legal penalties that would follow such manipulation when caught.
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Christine Parlour |
Berkeley Haas | Did Not Answer | Bio/Vote History | |
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Thomas Philippon |
NYU Stern | Bio/Vote History | ||
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Manju Puri |
Duke Fuqua | Bio/Vote History | ||
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Michael R. Roberts |
UPenn Wharton | Bio/Vote History | ||
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Paola Sapienza |
Hoover Institution Stanford | Bio/Vote History | ||
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This is more persuasive but it depends. I think insider trading is the bigger first-order concern: an insider who knows the quarter is tracking above a strike has a clean, high-leverage way to trade on it, not sure about enforcement in this case
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Amit Seru |
Stanford GSB | Bio/Vote History | ||
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Robert Stambaugh |
UPenn Wharton | Bio/Vote History | ||
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Laura Starks |
UT Austin McCombs | Did Not Answer | Bio/Vote History | |
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Jeremy Stein |
Harvard | Bio/Vote History | ||
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Johannes Stroebel |
NYU Stern | Did Not Answer | Bio/Vote History | |
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David Thesmar |
MIT Sloan | Bio/Vote History | ||
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Sheridan Titman |
UT Austin McCombs | Bio/Vote History | ||
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Stijn Van Nieuwerburgh |
Columbia Business School | Bio/Vote History | ||
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Nancy Wallace |
Berkeley Haas | Bio/Vote History | ||
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Toni Whited |
UMich Ross School | Bio/Vote History | ||
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Haoxiang Zhu |
MIT Sloan | Bio/Vote History | ||
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