Discussion of: The option market’s anticipation of information content in earnings announcements
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Billings and Jennings (2011) develop a new measure of stock price sensitivity to earnings called anticipated information content (AIC). The main difference between an AIC and an earnings response coefficient (ERC) is that AICs measure expected rather than actual sensitivity. I evaluate the AIC’s potential usefulness in future research, and conclude that AICs have several disadvantages relative to ERCs but might be useful in rare circumstances. Estimates of AICs contain considerable measurement error and fail a primary test of construct validity when left uncorrected. I outline a method for correcting two of the three sources of measurement error, which can be used by researchers interested in pursuing work on AICs. The method may have uses beyond computing AICs because it yields a prediction of the unsigned change in stock price during a scheduled event window.
KeywordsStock options Earnings announcements Implied volatility Anticipated information content Return-earnings relation Earnings response coefficients
JEL ClassificationM41 M49 G14 G29
Thanks to two anonymous reviewers for helping to frame some of my thoughts for discussion.
- Billings, M. B., & Jennings, R. (2011). The option market’s anticipation of information content in earnings announcements. Review of Accounting Studies, 16(3). doi: 10.1007/s11142-011-9156-5.
- Chevis, G. M., & Sommers, G. A. (2007). Using market reaction to infer persistence of earnings surprises. Baylor University Working Paper. http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1013350.