Options Trading and the Extent that Stock Prices Lead Future Earnings Information

Abstract

Abstract: We examine the relation between options trading and the extent that stock prices lead future earnings information in the period 1998–2009. In a firm specific approach, we find that stock prices reflect future earnings information to a greater extent in firms’ post‐options‐listing period than in their pre‐options‐listing period. In a cross‐sectional setting, we find that stock prices of firms with readily available options trading reflect future earnings information more and earlier than those of firms without available options. In a sub‐sample containing only firms with listed options, we find that stock prices of firms with a high level of options trading volume reflect future earnings information more and earlier than those of firms with a low level of options trading volume. Findings in this study support the proposition that options trading results in more current information that is relevant for predicting future earnings being impounded into stock prices. Consistent with this proposition, we also document an inverse relation between options trading and the amount of new information provided by earnings announcements.