Get 20M+ Full-Text Papers For Less Than $1.50/day. Start a 14-Day Trial for You or Your Team.

Learn More →

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

Gao, Xiang; Gu, Jiahao; Zhang, Yingchao
Pacific Accounting Review , Volume 33 (3): 15 – Aug 13, 2021
Download PDF
15 pages

Loading next page...
 
/lp/emerald-publishing/option-informativeness-before-earnings-announcements-and-under-real-jNJvcncPS7
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 Review – Emerald Publishing

Published: Aug 13, 2021

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

References

  • Option trading, price discovery and earnings news dissemination
    Amin, K.I.; Lee, C.M.C.
  • Trading volume reactions to annual accounting earnings announcements: the incremental role of pre-disclosure information asymmetry
    Atiase, R.K.; Bamber, L.S.
  • All that glitters: the effect of attention and news on the buying behavior of individual and institutional investors
    Barber, B.M.; Odean, T.
  • Determinants of bid-ask spreads in the over-the-counter market
    Benston, G.J.; Hagerman, R.L.
  • Fact and fantasy in the use of options
    Black, F.
  • Does net buying pressure affect the shape of implied volatility functions?
    Bollen, N.P.B.; Whaley, R.E.
  • Informational content of option volume prior to takeovers
    Cao, C.; Chen, Z.; Griffin, J.M.
  • Informed trading in stock and option markets
    Chakravarty, S.; Gulen, H.; Mayhew, S.
  • The informational role of stock and option volume
    Chan, K.; Chung, Y.P.; Fong, W.-M.
  • Trading volume and cross-autocorrelations in stock returns
    Chordia, T.; Swaminathan, B.
  • Option trading: information or differences of opinion?
    Choy, S.K.; Wei, J.
  • Earnings announcements and option returns
    Chung, S.G.; Louis, H.
  • Real and accrual-based earnings management in the pre- and post-Sarbanes-Oxley periods
    Cohen, D.A.; Dey, A.; Lys, T.Z.
  • A model of asset trading under the assumption of sequential information arrival
    Copeland, T.E.
  • Noise trader risk in financial markets
    De Long, B.; Shleifer, A.; Summers, L.H.; Waldmann, R.J.
  • Earnings management to exceed thresholds
    Degeorge, F.; Patel, J.; Zeckhauser, R.J.
  • The information content of implied skewness and kurtosis changes prior to earnings announcements for stock and option returns
    Diavatopoulos, D.; Doran, J.S.; Fodor, A.; Peterson, D.R.
  • Option volume and stock prices: evidence on where informed traders trade
    Easley, D.; O’Hara, M.; Srinivas, P.S.
  • A five-factor asset pricing model
    Fama, E.F.; French, K.R.
  • Stock repurchases as an earnings management mechanism: the impact of financing constraints
    Farrell, K.; Unlu, E.; Yu, J.
  • Stock prices and volume
    Gallant, A.R.; Rossi, P.E.; Tauchen, G.
  • Anticipating uncertainty: straddles around earnings announcements
    Gao, C.; Xing, Y.; Zhang, X.
  • Why does the option to stock volume ratio predict stock returns?
    Ge, L.; Lin, T.-C.; Pearson, N.D.
  • The economic implications of corporate financial reporting
    Graham, J.R.; Harvey, C.R.; Rajgopal, S.
  • One security, many markets: determining the contributions to price discovery
    Hasbrouck, J.
  • Testing for linear and nonlinear grander causality in the stock price-volume relation
    Hiemstra, C.; Jones, J.D.
  • Option trading and the relation between price and earnings: a cross-sectional analysis
    Ho, L.-C.J.
  • An empirical examination of the dispersion and accuracy of analyst forecasts surrounding option listing
    Ho, L.-C.J.; Hassell, J.M.; Swidler, S.
  • Does option trading convey stock price information?
    Hu, J.
  • Earnings announcements, stock price adjustments and the existence of exchange-listed options
    Jennings, R.; Starks, L.
  • The option to stock volume ratio and future returns
    Johnson, T.L.; So, E.C.
  • The impact of options trading on the market quality of the underlying security: an empirical analysis
    Kumar, R.; Sarin, A.; Shastri, K.
  • Trade size and information-motivated trading in the options and stock markets
    Lee, J.; Yi, C.H.
  • Trading volume: definitions, data analysis, and implications of portfolio theory
    Lo, A.W.; Wang, J.
  • Option listing and the stock-price response to earnings announcements
    Mendenhall, R.R.; Fehrs, D.H.
  • Is there price discovery in equity options?
    Muravyev, D.; Pearson, N.D.; Broussard, J.P.
  • Volatility information trading in the option market
    Ni, S.X.; Pan, J.; Poteshman, A.M.
  • Estimating distributed lags in short panels with an application to the specification of depreciation patterns and capital stock constructs
    Pakes, A.; Griliches, Z.
  • The information in option volume for future stock prices
    Pan, J.; Poteshman, A.M.
  • The ex ante and ex post price effects of quarterly earnings announcements reflected in option and stock prices
    Patell, J.M.; Wolfson, M.A.
  • Accounting accruals, heterogeneous investor beliefs, and stock returns
    Peng, E.Y.; Yan, A.; Yan, M.
  • Trading volume in options and common stock around quarterly earnings announcements
    Philbrick, D.R.; Stephan, J.A.
  • O/S: the relative trading activity in options and stock
    Roll, R.; Schwartz, E.; Subrahmanyam, A.
  • Earnings management through real activities manipulation
    Roychowdhury, S.
  • Price impacts of options volume
    Schlag, C.; Hans, S.
  • Option markets and the informational content of accounting earnings releases
    Skinner, D.
  • Options trading volume and stock price response to earnings announcements
    Truong, C.; Corrado, C.
  • Evidence on the trade-off between real activities manipulation and accrual-based earnings management
    Zang, A.Y.