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Options trades, short sales and real earnings management

Options trades, short sales and real earnings management
Options trades, short sales and real earnings management
We study the link between measures of stock options’ volatility and firms’ real earnings management (RM). We hypothesize that RM causes uncertainty in the value of a firm’s common stock and, as a result, increases the volatility spread and skew of the firm’s options. Spread and skew proxy for investors’ uncertainty in the value of the options underlying a stock. Consistent with our hypothesis, we find an association between a firm’s use of RM, and the volatility spread and skew in the firm’s options, more precisely in its put options. We also study the link between short selling and the extent of RM but do not find a consistent relationship between the two.
0001-4788
400-427
Mellado-Cid, Cristhian
155cfb09-e6f9-488c-bb2e-91dcd77a9bbc
Jory, Surendranath
2624eb24-850a-48f6-b3c6-c96749b87322
Ngo, Thanh
852ea7b9-fd74-4a39-9281-87626e50886b
Mellado-Cid, Cristhian
155cfb09-e6f9-488c-bb2e-91dcd77a9bbc
Jory, Surendranath
2624eb24-850a-48f6-b3c6-c96749b87322
Ngo, Thanh
852ea7b9-fd74-4a39-9281-87626e50886b

Mellado-Cid, Cristhian, Jory, Surendranath and Ngo, Thanh (2019) Options trades, short sales and real earnings management. Accounting and Business Research, 49 (4), 400-427. (doi:10.1080/00014788.2019.1573655).

Record type: Article

Abstract

We study the link between measures of stock options’ volatility and firms’ real earnings management (RM). We hypothesize that RM causes uncertainty in the value of a firm’s common stock and, as a result, increases the volatility spread and skew of the firm’s options. Spread and skew proxy for investors’ uncertainty in the value of the options underlying a stock. Consistent with our hypothesis, we find an association between a firm’s use of RM, and the volatility spread and skew in the firm’s options, more precisely in its put options. We also study the link between short selling and the extent of RM but do not find a consistent relationship between the two.

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Accepted/In Press date: 10 January 2019
e-pub ahead of print date: 17 February 2019

Identifiers

Local EPrints ID: 427626
URI: https://eprints.soton.ac.uk/id/eprint/427626
ISSN: 0001-4788
PURE UUID: ecde1e47-5ebf-4499-b526-fce83027c87e

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Date deposited: 24 Jan 2019 17:30
Last modified: 30 Apr 2019 16:30

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Contributors

Author: Cristhian Mellado-Cid
Author: Thanh Ngo

University divisions

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