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Option informativeness before earnings announcements and under real activity manipulation

Option informativeness before earnings announcements and under real activity manipulation This paper aims to investigate whether single-name options trading prior to earnings announcements is more informative when there exist real activity manipulations.Design/methodology/approachUsing 5,419 earnings announcements during 2004–2018 made by 208 public US companies with relatively high options volumes ranked by the CBOE, the authors uncover two regularities using predictive regressions for stock return.FindingsFirst, the total options volume up to twenty days pre-announcement is significantly higher than that in other periods only for earnings management firms; moreover, after detailing options characteristics, the authors find these intensive pre-announcement trading to be concentrated in transactions of in-the-money call and long-term maturity put options. Second, an increase in the single-name call minus put options volume can positively predict the underlying stock’s next-day excess return much better in real earnings management firms, with a larger magnitude of effect in periods right before regular earnings announcement dates.Originality/valueThis paper makes a marginal and novel contribution by showing that real earnings management can serve as a proxy for the potential profit from informed trading in options as the return predictability of options volume becomes stronger for firms that have the manipulation motive and indeed perform manipulative actions. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Pacific Accounting Review Emerald Publishing

Option informativeness before earnings announcements and under real activity manipulation

Pacific Accounting Review , Volume 33 (3): 15 – Aug 13, 2021

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Publisher
Emerald Publishing
Copyright
© Emerald Publishing Limited
ISSN
0114-0582
DOI
10.1108/par-07-2020-0090
Publisher site
See Article on Publisher Site

Abstract

This paper aims to investigate whether single-name options trading prior to earnings announcements is more informative when there exist real activity manipulations.Design/methodology/approachUsing 5,419 earnings announcements during 2004–2018 made by 208 public US companies with relatively high options volumes ranked by the CBOE, the authors uncover two regularities using predictive regressions for stock return.FindingsFirst, the total options volume up to twenty days pre-announcement is significantly higher than that in other periods only for earnings management firms; moreover, after detailing options characteristics, the authors find these intensive pre-announcement trading to be concentrated in transactions of in-the-money call and long-term maturity put options. Second, an increase in the single-name call minus put options volume can positively predict the underlying stock’s next-day excess return much better in real earnings management firms, with a larger magnitude of effect in periods right before regular earnings announcement dates.Originality/valueThis paper makes a marginal and novel contribution by showing that real earnings management can serve as a proxy for the potential profit from informed trading in options as the return predictability of options volume becomes stronger for firms that have the manipulation motive and indeed perform manipulative actions.

Journal

Pacific Accounting ReviewEmerald Publishing

Published: Aug 13, 2021

Keywords: Real earnings management; Earning announcement; Near-term return predictability; Option trading volume; G12; G13; G14; M41

References