DO OPTION TRADERS TARGET FIRMS WITH POOR EARNINGS QUALITY

Cristhian Mellado, Surendranath R. Jory and Thanh N. Ngo

2016 Papers from Job Market Papers

Abstract: We study the behaviour of investors trading options on the stock of firms with abnormal level of production costs, discretionary expenditure and accruals, i.e., firms that are suspects of engaging in earnings management. We differentiate between real earnings management and accruals management since the time it takes for each to unravel is not the same and they differ in their opacity. Our findings suggest that option traders pay attention to suspect financial reporting and that the motivations to trade in put options are, at least in part, related to earnings management at the underlying firms. We document a strong and positive association between put-call implied volatility and the proxies for earnings management.

JEL-codes: D82 G14 M41 (search for similar items in EconPapers)
Date: 2016-01-27
New Economics Papers: this item is included in nep-cfn
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