The Option Market's Anticipation of Information Content in Earnings Announcements
Mary Brooke Billings
New York University
Robert H. Jennings
Indiana University - Kelley School of Business - Department of Finance
Review of Accounting Studies, Forthcoming
We exploit information in option prices in order to study whether the ex post responsiveness of tock prices to earnings information is reflected from an ex ante, firm- and quarter-specific perspective. Specifically, we develop a measure of anticipated information content (AIC) that isolates the forecasted magnitude of the stock market’s reaction to earnings information. We find that the AIC positively correlates with the ex post magnitude of the stock market sensitivity to unexpected earnings, increases with earnings persistence, firm growth prospects, the richness of firms’ information environments and the presence of (and changes in) sophisticated ownership, and decreases with discount rates. Our paper sheds light on the role that earnings information plays in shaping option-market behavior and offers researchers an option-market approach to studying the responsiveness of stock prices to earnings information.
Number of Pages in PDF File: 47
Keywords: information content of earnings announcements, options, volatility, institutional ownership, information environment, return-earnings relation
JEL Classification: M41, M49, G14, G29Accepted Paper Series
Date posted: March 25, 2011
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