The Relative Option to Stock Volume (OS) and Market Response to Earnings Surprises
2014 American Accounting Association (AAA) Conference
51 Pages Posted: 8 Jan 2014 Last revised: 17 Nov 2016
Date Written: May 1, 2014
This study examines the effect of option volume relative to stock volume (O/S) on market response to earnings surprises. The market reaction per unit of earnings surprise is lower for firms that have high O/S prior to earnings announcement than for firms with low O/S prior to earnings announcement. The difference is exacerbated for higher levels of preannouncement returns. Results suggest informed trading by option traders stimulates preemption of the information content of earnings releases and makes earnings surprises less of a surprise. Overall, results are consistent with the view that options improve informational efficiency. Results are robust to several controls.
Keywords: Price Discovery, Relative Option to Stock Volume (OS), Earnings Surprises, Earnings Response Coefficient, Information and Market Efficiency
JEL Classification: D82, G12, G13, G14, M41
Suggested Citation: Suggested Citation