The option market’s anticipation of information content in earnings announcements

Mary Brooke Billings () and Robert Jennings ()
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Mary Brooke Billings: New York University
Robert Jennings: Indiana University

Review of Accounting Studies, 2011, vol. 16, issue 3, No 10, 587-619

Abstract: Abstract We exploit information in option prices in order to study whether the ex post responsiveness of stock 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 (search for similar items in EconPapers)
JEL-codes: G14 G29 M41 M49 (search for similar items in EconPapers)
Date: 2011
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DOI: 10.1007/s11142-011-9156-5

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