Past managerial guidance and returns to variance trading around earnings announcements

I investigate the relationship between past managerial guidance and realized variance risk premiums ( VRP s) – i.e., the difference between implied and realized variance – in equity options around earnings announcements. I find that implied variances are lower before earnings announcements but VRP s are higher when firms provide guidance. I also find higher option‐implied jump risk when firms issue surprising guidance. Further tests suggest a portion of the higher VRP s are due to changes in perceived higher‐order risks, but traders also underreact to the precision of information in short‐term guidance. These results are attenuated for firms with a better information environment.