Options Trading and the Extent that Stock Prices Lead Future Earnings Information

Abstract

We examine the relation between options trading and the extent that stock prices lead future earnings information in the period 1998–2009. In a firm specific approach, we find that stock prices reflect future earnings information to a greater extent in firms’ post‐options‐listing period than in their pre‐options‐listing period. In a cross‐sectional setting, we find that stock prices of firms with readily available options trading reflect future earnings information more and earlier than those of firms without available options. In a sub‐sample containing only firms with listed options, we find that stock prices of firms with a high level of options trading volume reflect future earnings information more and earlier than those of firms with a low level of options trading volume. Findings in this study support the proposition that options trading results in more current information that is relevant for predicting future earnings being impounded into stock prices. Consistent with this proposition, we also document an inverse relation between options trading and the amount of new information provided by earnings announcements.

Managerial Discretion in Accruals and Informational Efficiency

“…Furthermore, sophisticated market participants, such as institutional investors and analysts, are expected to facilitate information incorporation into prices (Boehmer and Kelley, 2009). In addition, prior literature finds that options trading facilitates informational efficiency (Watt et al, 1992;and Truong, 2012). Specifically, Truong (2012) finds that options trading increases the extent to which stock prices reflect future earnings due to private information flowing from the derivative markets to the market for the underlying security.…”

Too Good to be True? An Analysis of the Options Market's Reactions to Earnings Releases

“…4 This is in line with findings from other studies such asNg et al (2013), but is done using uncertainty measured using option market prices, rather than realized stock price movements. We also note that the mere presence of option markets on a stock makes cashflow information dissemination more efficient, as documented inTruong (2012). Our study is not biased by this fact because our sample consists only of earnings announcements for comanies where the stock has enough traded options to compute risk-neutral distributions.C 2016 John Wiley & Sons Ltd…”

Optionable Stocks and Mutual Fund Performance

“…In this paper, we investigate whether mutual fund managers show selection skills for stocks with options written on them (i.e., optionable stocks) and whether this stock characteristic predicts future fund performance. Our paper is motivated by the large body of literature that links underlying spot prices to the information content of options products (Cao, Chen, & Griffin, 2005;Cremers & Weinbaum, 2010;Hsieh & He, 2014;Jin, Livnat, & Zhang, 2012;Johnson & So, 2012;Ryu, 2011Ryu, , 2015Truong, 2012). One notable recent study by An, Ang, Bali, and Cakici (2014) shows that option-implied volatilities contain useful information for forecasting cross-sectional stock returns.…”