Option listing and the stock-price response to earnings announcements

Richard R. Mendenhall · Donald H. Fehrs

58 citations0/0 files storedJournal of Accounting and Economics

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Financial Markets and Investment Strategies Corporate Finance and Governance Auditing, Earnings Management, Governance

Abstract

We examine the effect of option listing on the immediate stock-price response to earnings announcements. Contrary to prior studies using earlier data, we find firms initiating option trading after 1986 fail to exhibit a significant decline in earnings response. We then examine 420 firms initiating option trading during 1973–1993. In a series of tests controlling for market-wide effects and changing firm size we find some evidence that option listing may actually increase the stock-price response to earnings, but no evidence listing reduces the response. Both longitudinal and cross-sectional tests produce similar results.

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References

1968An Empirical Evaluation of Accounting Income Numbers 1997The conservatism principle and the asymmetric timeliness of earnings1 1977Estimating betas from nonsynchronous data 1989Post-Earnings-Announcement Drift: Delayed Price Response or Risk Premium?1990Evidence that stock prices do not fully reflect the implications of current earnings for future earnings 1976Corporate Forecasts of Earnings Per Share and Stock Price Behavior: Empirical Test 1975Fact and Fantasy in the Use of Options 1985Predisclosure Information, Firm Capitalization, and Security Price Behavior Around Earnings Announcements

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2013Options trading volume and stock price response to earnings announcements 2014Unsophisticated Arbitrageurs and Market Efficiency: Overreacting to a History of Underreaction?2019Sophisticated Investor Attention and Market Reaction to Earnings Announcements: Evidence From the SEC’s EDGAR Log Files 2020Informed Options Trading Before Corporate Events

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