Option trading and the relation between price and earnings: a cross-sectional study

Article Abstract:

The different firm-specific variables that may explain the various information environments of firms with and without exchange-traded options are examined. The price-earnings relations of these firms are also investigated. Results reveal the five firm-specific attributes related to option firms: greater firm size, larger institutional concentration, higher analyst coverage, larger trading volume and more Wall Street Journal Index news releases. An analysis of 3,721 quarterly earnings reports of 431 firms from 1980 to 1983, a matching of subsamples based on the five variables and a control portfolio all show that the variability of abnormal stock returns around earnings announcements is dramatically higher for nonoption firms than option firms. The procedures also prove that the security prices predict accounting earnings of option firms than those of nonoption firms and that the a greater post-fiscal-year-end drift is exhibited by nonoptions firms.

Security and commodity exchanges, Analysis, Options (Finance)

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The explanatory power of earnings for stock returns

Article Abstract:

It is shown that a significant advancement in the statistical performance of models of earnings and returns is achievable through the utilization of a more general stipulation of the returns-earnings relation. The latest developments in market-based accounting research design were integrated together to generate a returns-earnings specification. This model incorporates a time-series and cross-sectional variance in the regression parameters, includes an earnings yield factor that follows the suggestions set by Ohlson, and groups the all-inclusive earnings into pre-exceptional, exceptional and extraordinary segments. Each feature is of considerable assistance in explaining price changes of security. Switching from the traditional model, which regresses an abnormal returns measure on earnings changes, to the most general model increases the adjusted R-squared from 0.10 to 0.38.

Models, Stock price forecasting, Earnings per share

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