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Past managerial guidance and returns to variance trading around earnings announcements
Author(s) -
Neururer Thaddeus
Publication year - 2020
Publication title -
accounting and finance
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.645
H-Index - 49
eISSN - 1467-629X
pISSN - 0810-5391
DOI - 10.1111/acfi.12465
Subject(s) - earnings , variance (accounting) , equity (law) , variance risk premium , jump , order (exchange) , economics , econometrics , business , actuarial science , accounting , finance , volatility (finance) , implied volatility , volatility risk premium , physics , quantum mechanics , political science , law
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.