Option Informativeness Before Earnings Announcements and Under Real Activity Manipulation

Gao, X.; Gu, J.; Zhang, Y.

Abstract

Purpose. This article investigates whether single name options trading prior to earnings announcements is more informative when there exist real activit y manipulation s Design/methodology/approach. Using 5,419 earnings announcements during 2004 20 18 made by 208 public U.S. companies with relatively high option s volume s ranked by the CBOE , we uncover two regularities using predictive regressions for stock return Findings. F irst, the total option s v olume up to twenty day s pre announcement is significantly higher than that in other periods only for earnings management firms ; moreover, after detailing options characteristics , we find these intensive pre announcement trading to be concentrate d in transactions of in the money call and long term maturity put option s . an increase in the single name call minus put options volume can positively predic t 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/value. This paper make s a marginal and novel contri bution by showing that real earnings management can serve as a proxy for the potential profit f rom informed trading in options as the return predictability of options volume becomes stronger for firms that have the manipulation motiv e and indeed perform manipulative actions

Citation

Gao, X., Gu, J., & Zhang, Y. (2021). Option Informativeness Before Earnings Announcements and Under Real Activity Manipulation. Pacific Accounting Review, 33(3), 361-375. https://doi.org/10.1108/par-07-2020-0090

• Journal Article Type: Article
• Acceptance Date: Mar 13, 2021
• Online Publication Date: May 21, 2021
• Publication Date: Aug 13, 2021
• Deposit Date: Mar 16, 2021
• Publicly Available Date: Mar 19, 2021
• Journal: Pacific Accounting Review
• Print ISSN: 0114-0582
• Publisher: Emerald
• Peer Reviewed: Peer Reviewed
• Volume: 33
• Issue: 3
• Pages: 361-375
• DOI: https://doi.org/10.1108/par-07-2020-0090
• Public URL: https://durham-repository.worktribe.com/output/1245427