Voluntary Disclosure and Option Pricing: The Case of Earnings Guidance and the Variance Risk Premium

Abstract

I investigate the effect of managerial guidance on the price of option related market protection, i.e., the variance risk premium (VRP). I confirm previous findings that implied variances are lower when firms issue management guidance. Second and more importantly, I document that the VRP is higher when firms provide guidance, and that this increase in the VRP is centered on the earnings announcement date. I additionally find that a higher moment of uncertainty — implied kurtosis levels (i.e., price jump risk) — is higher when firms issue guidance. Additional tests examining characteristics of managerial guidance reveal these findings are strongest for firms issuing sporadic guidance, guidance issued close to earnings announcements, and guidance that is inconsistent with the market’s expectations when issued. Conversely, guidance without these characteristics are not associated with the VRP.