Option Prices and Disclosure

Abstract

In this paper, I develop a measure of the difference in the amount of information that investors expect a forthcoming disclosure to contain should it reveal good news versus bad news (the disclosure's asymmetry). I derive this measure from a model of option prices leading up to an asymmetric disclosure. The model shows that the disclosure's asymmetry can be captured using a weighted change in option-implied return skewness leading up to its release. This measure's ability to capture investors' prior beliefs regarding asymmetry is advantageous when studying ex-ante decisions including contracting and information acquisition choices. I implement the measure on a sample of large firms' quarterly earnings announcements, finding evidence that investors anticipate cross-sectional, but not time-series variation in earnings' asymmetry.