Option Informativeness Before Earnings Announcements and Under Real Activity Manipulation

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