Accounting Quality, Information Risk and Implied Volatility around Earnings Announcements

Abstract

We examine the impact of accounting quality, used as a proxy for information risk, on the behavior of equity implied volatility around quarterly earnings announcements. Using US data during 1996-2010, we observe that lower (higher) accounting quality significantly relates to higher (lower) levels of implied volatility (IV) around announcements. Worse accounting quality is further associated with a significant increase in IV before announcements, and is found to relate to a larger resolution in IV after the announcement has taken place. We interpret our findings as indicative of information risk having a significant impact on implied volatility behavior around earnings announcements.

Keywords: Accounting quality, accruals quality, information risk, earnings announcements, implied volatility, investor uncertainty

JEL Classification: G13, G14, M41