Option informativeness before earnings announcements and under real activity manipulation
2021
Purpose.
This article investigates whether single name options trading prior to earnings
announcements is more informative when there exist real activit y manipulation s
Design/methodology/approach.
Using 5,419 earnings announcements during 2004 20 18
made by 208 public U.S. companies with relatively high option s volume s ranked by the
CBOE , we uncover two regularities using predictive regressions for stock return
Findings.
F irst, the total option s v olume up to twenty day s pre announcement is
significantly higher than that in other periods only for earnings management firms ;
moreover, after detailing options characteristics , we find these intensive pre
announcement trading to be concentrate d in transactions of in the money call and long
term maturity put option s . an increase in the single name call minus put options
volume can positively predic t 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/value.
This paper make s a marginal and novel contri bution by showing that
real earnings management can serve as a proxy for the potential profit f rom informed
trading in options as the return predictability of options volume becomes stronger for
firms that have the manipulation motiv e and indeed perform manipulative actions
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