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Do Option Traders Target Firms With Poor Earnings Quality

Author

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  • Cristhian Mellado
  • Surendranath R. Jory
  • Thanh N. Ngo

Abstract

We study the behaviour of investors trading options on the stock of firms with abnormal level of production costs, discretionary expenditure and accruals, i.e., firms that are suspects of engaging in earnings management. We differentiate between real earnings management and accruals management since the time it takes for each to unravel is not the same and they differ in their opacity. Our findings suggest that option traders pay attention to suspect financial reporting and that the motivations to trade in put options are, at least in part, related to earnings management at the underlying firms. We document a strong and positive association between put-call implied volatility and the proxies for earnings management.

Suggested Citation

  • Cristhian Mellado & Surendranath R. Jory & Thanh N. Ngo, 2016. "Do Option Traders Target Firms With Poor Earnings Quality," 2016 Papers pme563, Job Market Papers.
    • Handle: RePEc:jmp:jm2016:pme563
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    More about this item

    JEL classification:

    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • M41 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Accounting
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design

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