The Option Market's Anticipation of Information Content in Earnings Announcements

47 Pages Posted: 25 Mar 2011  

Mary Brooke Billings

New York University

Robert H. Jennings

Indiana University - Kelley School of Business - Department of Finance

Date Written: January 2011

Abstract

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.

Keywords: information content of earnings announcements, options, volatility, institutional ownership, information environment, return-earnings relation

JEL Classification: M41, M49, G14, G29

Suggested Citation

Billings, Mary Brooke and Jennings, Robert H., The Option Market's Anticipation of Information Content in Earnings Announcements (January 2011). Review of Accounting Studies, Forthcoming. Available at SSRN: https://ssrn.com/abstract=1791829

Mary Brooke Billings (Contact Author)

New York University ( email )

44 West 4th Street
New York, NY NY 10012
United States
(212) 998-0097 (Phone)

Robert H. Jennings

Indiana University - Kelley School of Business - Department of Finance ( email )

1309 E. 10th St.
Bloomington, IN 47405
United States
812-855-2696 (Phone)
812-855-5875 (Fax)

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